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October

Trump vs. Biden: Whose tax plan makes for good tax law?

By Alicyn McLeod

 

What defines good tax law? Taxpayers have their own thoughts on this. As a tax professional, I certainly have my own opinions. For researched and broad-reaching direction on this, we can look to a few sources, including the American Institute of CPAs guidance. The AICPA describes an effective tax system as one that is fair/equitable, neutral, simple/certain, and economically efficient:

 

1. Fair/equitable: Compare the tax returns of two taxpayers with the same income. Would they show the same tax liability? From a fairness standpoint, one could argue they should. If one taxpayer’s income is higher than another’s, does that taxpayer pay more taxes? Again, if the tax rules in place are equitable, one would expect so.


2. Neutral: Ideally, taxes should be neutral, meaning they distort behavior as little as possible. Are tax laws influencing your decision to donate to charity or buy a new home? Are you moving to a new state for tax reasons? If so, these tax laws aren’t neutral.

 

3. Simple/certain: For most people, the U.S. Tax Code is a foreign language. The concepts of simplicity and certainty assert that taxpayers should be able to easily understand tax rules and apply them consistently. Taxpayers should have a clear idea of how and when a tax is paid. They should have confidence that a tax has been calculated correctly. The more complicated and vague tax laws are, the less certainty taxpayers have that their tax liabilities are accurate.

 

4. Economically efficient: Effective taxing regimes don’t obstruct economic growth. This concept can be harder than the others to pin down. Whether a tax law is fair, neutral or simple is fairly easy to measure. Just ask your tax advisor! However, whether a new tax law will allow for the economy to “do its thing” must be modeled and, well, guessed. Furthermore, because nothing happens in a vacuum, the historic impact of a particular tax policy may not always be clear either.

 

This article looks at a few key components of President Donald Trump and former Vice President Joe Biden’s tax positions from the perspective of whether their ideas meet the “good tax law” tests of being fair, neutral, simple and economically efficient. (The Libertarians and the Green Party also have their take on taxes, but, well, I had to stop somewhere.)

 

Individual tax rates

Currently, the top tax rate for ordinary income, such as wages, is 37 percent. Biden would like to increase that back to the pre-2018 rate of 39.6 percent and have this rate apply for individuals with taxable income over $400,000. Trump would like to keep the 37 percent rate and has hinted at lowering the 22 percent rate for middle-income taxpayers to 15 percent or restructuring tax brackets so more taxpayers fall into the lower brackets.

 

Biden’s plan prioritizes fairness. It justifies a rate hike for high income earners based on their ability to pay. This can distort behavior, however, as those in the top tax bracket look for other ways to lower their tax bills. As we don’t have much detail for Trump’s ideas on this, moving more taxpayers into lower brackets may or may not demonstrate fairness depending on how “middle-income” is defined.

 

Capital gains

Under current law, certain dividends and long-term capital gains from investments held for more than one year are taxed at lower rates than ordinary income. The top tax rate for long-term capital gains is 23.8 percent when including the net investment income tax. Trump has expressed interest in lowering the top rate to 15 percent or indexing the rate for inflation. Biden, on the other hand, wants to tax long-term capital gains at ordinary income rates for those with taxable income greater than $1 million.

 

For many, Trump’s ideas seem unfair because they can result in situations in which a taxpayer with higher investment-related income is paying less federal taxes than a taxpayer with lower non-investment income, such as wages. Biden’s plan tries to address this, at least with high income earners, touching on the good tax law components of neutrality and simplicity. However, it’s important to note the original intention of taxing this type of income at lower levels, dividends at least, is because this income has already been taxed at the corporate level before it makes its way to shareholders. In other words, the lower rate helps minimize overall double taxation — a potential impediment to economic efficiency.

 

Itemized deductions

The Tax Cuts and Jobs Act of 2017 significantly increased the standard deduction while limiting certain itemized deductions. These changes are currently scheduled to expire at the end of 2025. If re-elected, Trump would like to make them permanent. Under Biden’s tax plan, the value of itemized deductions would be capped at 28 percent for taxpayers with incomes over $400,000.

 

The increased standard deduction was a step toward a simpler tax system. It eliminated the need for many taxpayers to calculate various itemized deductions. On the other hand, many individuals with large mortgages and significant charitable giving continue to benefit from itemizing their deductions. In other words, with the standard deduction so much higher, continuing to keep itemized deductions in the Tax Code disproportionately benefits those who have higher levels of deductions to itemize. Between pre-TCJA law and TCJA, the percentage of individuals itemizing their deductions dropped from 31 percent to 14 percent, with nearly all higher earners continuing to itemize while many middle earners stopped. This situation runs contrary to the effective tax principles of equity and, to some extent, neutrality. Biden’s plan seems to recognize this by capping the value of itemized deductions at 28 percent for higher earners.

 

Child tax credit

Under current federal tax law, a $2,000 child tax credit for children under age 17, plus a $500 credit for certain other dependents, are available for many taxpayers. Biden supports the expansion of the child tax credit as outlined in the original version of the HEROES Act, recently revised, that passed the House earlier this year. This would increase the child tax credit to $3,000 per child for children ages 6 to 17 and $3,600 for children under age 6. Biden also would like to make the credit fully refundable. Trump hasn’t proposed any major changes to the current child tax credit rules.

 

Some argue that the child tax credit is unfair since it treats taxpayers with children differently than those without children. From that perspective, Biden’s plan would be lower on the fairness scale. However, note that this credit is a significant benefit for lower income families, whose ability to pay taxes is disproportionately reduced by the expense of raising children as compared to higher-income families. In other words, the child tax credit could instead be viewed as a way to remove some of the costs associated with child rearing from the equation and put families on more of an equal ground for tax purposes than taxpayers without young children. Whether this credit and its expansion are seen as fair will depend on your perspective.

 

Deduction for pass-through income

If you own a pass-through business such as a partnership or S corporation, you may benefit from the 20 percent qualified business income (QBI) deduction that was part of the TCJA. This deduction is set to expire at the end of 2025 along with other components of the TCJA. Trump’s plans regarding the deduction aren’t clear at this time. Biden would like to phase out the deduction for those with income greater than $400,000. Based on the mechanics of the deduction, an income threshold applies to many passthrough business owners already.

 

The qualified business income deduction is one of the more complicated provisions of U.S. tax law, and its various limitations make it challenging for taxpayers to predict what their deduction will be. For the most part, it does not meet the good tax policy component of certainty/simplicity. Also, it does not treat businesses in different industries equally and treats business owners differently from employees in the same line of work. For these and other reasons, the QBI deduction is neither fair nor neutral. Although Biden’s plan of phasing out the deduction for certain high earners could possibly increase fairness, doing so would add yet another component to calculating an already confusing deduction.

 

Payroll taxes

In an August 2020 Presidential Memorandum, Trump directed the U.S. Treasury to defer Social Security tax obligations of certain American workers for Sept. – Dec. 2020. If re-elected, Trump would like to eliminate these deferred taxes by providing a temporary payroll tax holiday. Biden would like to expand the Social Security tax by applying it to wages greater than $400,000. Currently this tax is capped at wages of around $137,000, meaning once a worker makes over this amount at any point in a calendar year, Social Security taxes no longer apply to further earnings for the remainder of that year.

 

Because of this wage cap, Social Security taxes are regressive. In the tax world, regressive means that the more money you make or have, the less percentage of your income or wealth is spent on the tax. To illustrate, someone who is under the Social Security wage threshold earning $30,000 per year will pay about $1,900 of Social Security tax while someone overthe Social Security wage who makes $300,000 will pay about $8,500 of Social Security tax. The first person pays a little over 6 percent of their earnings in Social Security taxes while the second person pays a little less than 3 percent of their earnings in Social Security taxes. We see a similar situation with some consumption-based taxes, such as sales taxes. Compare a low-earning family to a high-earning family of the same size and their grocery bills are likely to be about the same. However, the percentage of sales tax the low-earning family pays relative to their earnings will be higher than the high-earning family.

 

As you can see, regressive taxes such as Social Security taxes impact lower-earning taxpayers more than higher-earning taxpayers, and thus run counter to the sound tax policy principle of fairness. In theory, Trump’s payroll tax deferral was a way to temporarily make the payroll tax somewhat less regressive, as the deferral only applied to individuals earning around less than $100,000 per year. To be effective, however, the deferral would need to become permanent, which would take congressional approval. Without such an agreement, workers deferring their taxes now will pay back the deferred taxes in 2021, which not only brings back the regressive nature of the tax but puts such individuals in a tough cash flow position. Further, if this move was meant to provide greater economic momentum by putting more cash into workers’ wallets, it doesn’t address those without jobs. TheU.S. unemployment rate was around 8 percent as of Sept. 2020 as compared to 3.5 percent the same time last year. With this provision’s ultimate impact up in the air, many employers, including the U.S. House of Representatives, have so far declined to participate.

 

Biden’s proposal takes a different, more permanent, approach to making payroll taxes less regressive and more equitable. His stance improves the certainty aspect of payroll tax adjustments from a temporary deferral but could generate other issues as higher-earning workers and business owners adjust for a potentially significant hit to their earned income. In addition to the tax side of this, we must also consider how adjustments to Social Security tax withholdings impact the solvency of the Social Security system itself.

 

Corporate taxes

Currently, C corporations are taxed at a flat rate of 21 percent. Before the Tax Cuts and Jobs Act of 2017, C corporation tax rates ranged from 15 percent to 35 percent. Trump has stated that he prefers a 20 percent rate, but a formal proposal hasn’t been released. Biden would like to see the corporate tax rate at 28 percent. He has also proposed a 15 percent minimum tax on “book” income, presumably making it more difficult for large companies to report little to no income for tax purposes.

 

Biden’s proposal is primarily motivated by fairness. Many U.S. taxpayers are concerned that large corporations aren’t paying their “fair share.” While understandable, this position ignores the belief among many tax and economic policy experts that a significant portion of corporate taxes are ultimately paid by workers, shareholders, and consumers as opposed to companies themselves. For example, the Council of Economic Advisors — the agency within the executive branch that advises the president on economic policy — published a study in Oct. 2017 indicating that lower corporate tax rates would both increase real wages to workers and increase GDP, speaking to the sound tax policy components of being fair and economically efficient. Further, changes to how C corporations are taxed can impact a business’ choice of tax entity; new or existing businesses may be able to adjust their tax structure to either move to — or away from — C corporation taxing regimes, depending on which is more favorable at the time. Lastly, with countless estimates and convoluted calculations involved in many larger companies’ financial statements, an income tax imposed on a business’ book income would not be simple or neutral.

 

There you have it: the Republican and Democratic candidates’ ideas on several key tax issues. So, who makes the grade? While I’ll leave it up to you to make that call for yourself, here are some general observations:

 

  • Neither candidate has put forth a detailed, formal tax plan. As a tax professional, I would certainly appreciate that.
  • Understanding the impact of changes to tax law can be challenging and potentially impossible. As I’ve said earlier, nothing happens in a vacuum.
  • Overall, Biden’s ideas concentrate on being fair/equitable, while Trump’s plans are more focused on encouraging economic growth — hardly surprising given their party allegiances. As a tax advisor who’s helped clients navigate numerous convoluted and vague changes to tax law over the years, I would like to see tax platforms that focus on neutrality and simplicity.

 

Although tax policy won’t be the only thing on your mind as you cast your ballot, it probably will play an important role. If you have any questions about the candidates’ tax positions, please don’t hesitate to reach out.

 

 

 

Is Biden’s tax plan a reward for the working class?

By Tabassum Ali

 

Former vice president and Democratic presidential candidate Joe Biden’s tax proposal will limit direct tax increases to just 1.9 percent of taxpayers, a significant departure from the policies and impact of major tax revisions proposed by President Trump and enacted in late 2017, according to a report from the Institute on Taxation and Economic Policy.

 

The Tax Acts and Jobs Act signed into law by President Trump was seen by many as a lopsided victory for the wealthy, banks and corporate America, particularly financial services companies, in the form of a lower corporate rate (21 percent) and more preferable tax treatment of pass-through entities.

 

However, the ITEP report noted, “The Biden plan would restore higher taxes on corporations and high-income individuals, generally protect taxpayers with incomes of $400,000 or less from tax rate increases and provide an array of new and revised personal tax benefits targeted for low- and middle- income families.”

 

As per Biden’s plan, taxable income below $400,000 would continue to be taxed at rates enacted as part of the 2017 tax law; however, taxpayers earning more than $400,000 would be subject to rates of 35 and 37 percent. The plan would further limit itemized deductions and the 20 percent deduction for certain pass-through business income for those with taxable income exceeding $400,000.

 

The ITEP experts believe that total tax increases on high-income taxpayers would stand at $209.3 billion. Ninety-seven percent of this tax increase would fall on the richest 1 percent, and the remaining 3 percent of direct tax increase would fall on the next richest 4 percent.
 

The ITEP report also pointed to the “most significant” change in Biden’s tax plan for U.S. corporations earning domestically and offshore. Under the Trump tax law, corporate profits are generally taxed at 21 percent, but the offshore profits of U.S. corporations are not subject to the federal corporate income tax, except “global intangible low-taxed income,” which is defined as profits earned in a foreign country that exceed 10 percent of the tangible assets the company holds in that country.

 

There have been numerous calls by economic policy experts to fix the decades-old dysfunctional tax system. Under the old system, corporations were allowed to “defer” paying taxes on profits earned offshore until those profits were officially brought to the United States. The new system in the TCJA didn’t address the fundamental problem of corporate taxes. Under the TCJA, offshore profits are taxed lower than domestic profits. However, both approaches encourage American corporations to use accounting gimmicks to show profits earned in the U.S. appear to be earned in tax havens, so they can either pay too little or no taxes at all.

 

According to the ITEP report, Biden would tax all offshore profits effectively at 21 percent, keeping the overall corporate tax rates at 28 percent. This tax increase would raise a total of $151 billion in 2022: $111 billion by directly raising the tax rate and $40 billion by limiting tax breaks for offshore profits granted by the 2017 tax law.

 

ITEP’s analysis further suggests that these corporate tax increases could be felt indirectly by individuals, particularly by the well off. Congress’ Joint Committee on Taxation assumes the working class bears a “quarter of the impact of a corporate tax hike (in the form of a wage reduction),” according to ITEP, and it takes “several years for this to happen.”

 

Keeping in mind the JCT and ITEP convention of the indirect effects of a tax increase on working-class families, experts believe the impact felt by those families could be offset by increasing the Child Tax Credit to $3,000 per child and an additional $600 for each child under the age of 6, as proposed in Biden’s tax plan.

 

 

 

Election 2020: What preparers and clients say about candidates’ tax plans

By Jeff Stimpson

 

Few U.S. elections in memory have presented candidates who differ more. In the presidential race especially — and when it comes to taxes — the choices seem clearly in one direction or the other.

 

Have clients noticed?

 

“Taxes represent the largest expenditure for most families, surpassing mortgages,” said Daniel Morris, senior partner at Morris + D’Angelo CPAs in San Jose, California. “Taxes matter. Taxes matter today. Taxes matter yesterday. Taxes matter tomorrow. People are asking, and those in the upper quartile and above are asking with more energy, ‘Should they sell? Should they move?”

 

“Our clients’ views on the candidates’ known tax plans are mixed,” said Timothy Speiss, a CPA and co-partner in charge of the personal wealth advisors practice at Top 100 Firm EisnerAmper in New York. “There is strong sentiment for retaining current estate and individual income tax provisions [and] current corporate tax rates.”

 

“While clients are very informed about the differences in the two [presidential] candidates’ proposals, many are taking a wait-and-see approach until after the election before undertaking significant tax-planning moves,” said James McGrory, a CPA and shareholder at Drucker & Scaccetti in Philadelphia.

 

Other issues more important?

Americans seem split on the topic of taxes — wanting to pay less but wanting others to pay more. According to recent trends of the Gallup polls, about half of Americans think they pay “about” the right amount of taxes and that lower-income Americans pay too much in taxes. Almost two out of three think upper-income and wealthy Americans pay too little and even more think corporations pay too little.

 

Yet few recent races for the White House seemed to occasion less public interest in candidates’ tax plans; the subject doesn’t appear prominently in major opinion polls about the candidates.

 

EisnerAmper’s perspectives, based on the firm’s research, publications, presidential candidates’ websites and released commentary and other information, outlines the proposals of Donald Trump and Joe Biden. Among the highlights of the many tax proposals of both candidates:

 

  • Trump: The president has already signed an executive order deferring the collection of Social Security payroll taxes that are taken out of each worker's paycheck; if re-elected, he has indicated a desire for the deferred taxes to be completely forgiven, and may also try to implement additional payroll tax cuts. Potentially to be proposed is a plan for the expiring provisions under the Tax Cuts and Jobs Act, and he has cited the idea of reducing the capital gains tax rate as well as indexing capital gains to inflation. Has called for “middle-class tax cuts” in the form of rate reductions. Proposes to expand Opportunity Zones and has outlined two policy proposals for companies that bring back jobs from China.

 

  • Biden: Proposes increasing the top individual tax rate for taxpayers with income exceeding over $400,000 and phasing out the 199A passthrough business deduction at incomes exceeding the same amount, capping tax benefits of itemized deductions, phasing out itemized deductions and taxing capital gains and qualified dividends for individuals with more than $1 million in income at ordinary income rates. For businesses, proposes increasing corporate tax rates, creating a new corporate minimum tax on global book income of $100 million or more, expanding credits and incentives for growth in American manufacturing, increase the GILTI and ending TCJA incentives that allow multinationals to lower taxes on income earned overseas.

“Most clients anticipate a Biden victory to lead to increased tax burdens, limitations on current credits and closure of various programs [such as] Opportunity Zones,” Morris added. “Under a second Trump term, most clients anticipate a stay-the-course, if not overall tax rate reduction — though after the spending frenzy of the COVID-19 era, this may be difficult to achieve.”

 

“Clients are very concerned that there’ll be significant tax increases if Joe Biden wins the presidency and the Senate becomes controlled by the Democrats,” McGrory said. “Not only would there be an increase in the top individual income tax rate … and a change in the long-term capital gain rate for high-earning individuals, but there would also be major estate tax changes such as the elimination of the basis step-up upon death and a reduction of the life-time exemption

amount to $5 million, indexed for inflation.”

 

In this area, as in all others in this election, emotion sometimes runs high.

 

“Since I’m from a very Blue state, most of my clients are so disgusted at the constant lying and moral failures of Trump that there’s really no talk about taxes,” said Rob Seltzer, a CPA at Seltzer Business Management in Los Angeles. “I only had one client reach out to me about it and she’ll be voting for Biden regardless. She’s worried about her mother who is 97 and has two pieces of very valuable real estate with low basis. Under current law, there would be little to no tax to pay. She has concerns about the elimination of the basis step-up.”

 

Is it possible, too, even in this frantic year, that little will happen?

 

“I haven’t seen the detailed plans for either candidate and my clients aren’t really asking me questions. I tell my clients it’s best to deal with what we currently have,” said Daniel Henn, a CPA in Rockledge, Florida. “If Biden is elected, along with an anticipated Democrat control of Congress, expect the tax rates to be increased, and many changes made from Tax Cuts and Jobs act to be repealed.”

 

“If Trump is re-elected, along with an anticipated Democrat control of Congress, I don’t expect much tax-wise to get done unless the Democrats can have the override-of-veto numbers, which I don’t think will happen,” Henn said.

 

 

 

Putting the election in perspective

Learn how to plan ahead in the face of uncertainty.

 

Key takeaways

  • In the near term, there may be more ups and downs in the market than usual due to election wrangling. But longer term, the key is the economic recovery, which is in its early phase, a period that has historically been good for stocks.
  • Rising taxes haven’t meant falling stock prices historically. While future tax policies are unclear, even if rates do go up, there are financial planning moves to make to limit the potential impact on your bottom line.
  • More fiscal stimulus and continued low interest rates are likely. So staying invested and riding out volatility may make good sense.

 

Seizing opportunities and managing risks are an essential part of investing. Sometimes you can see them clearly. But other times, uncertainty can cloud the way, leading to stress, even paralysis. For some investors, right now may be one of those times.

 

The good news is there are things you can do in the face of election and other uncertainties to stay in control of your destiny. Here are 9 insights from Fidelity pros to help you foresee possible risks, seize opportunities, and stay focused on reaching your personal goals.

 

1. Delayed or contested election results could fuel short-term market volatility

Because of the expected surge in mail-in voting due to the pandemic, it’s possible the election results will not be known on election night and a complete vote count may not be available for days or weeks.

 

"When you look at futures markets, they are already pricing in higher volatility in the November and December time frame,” says Dirk Hofschire, senior vice president of asset allocation research at Fidelity. “This may ultimately be short-lived because the Constitution requires a new president and congress in January. But I do think as an investor, the markets are telling you there may be a little bit more bouncing around than usual."

 

For most investors with a solid long-term plan, there is no reason to do anything in the face of short-term volatility. For opportunistic investors with cash on the sidelines, a pullback could present opportunities.

 

For more, read Viewpoints on Fidelity.com: What if election results are delayed or contested?

 

2. Longer term, the economy is the key to the markets

While the election may roil markets in the short term, Jurrien Timmer, Fidelity’s director of global macro, says the pace of the economic recovery and the course of the coronavirus pandemic are likely to be more important to stock market returns than who ultimately controls the White House and Congress.

 

Historically, Octobers of election years have experienced heightened volatility. But once the winner is declared, markets have rebounded. Over the course of a full 4-year presidential term, investment returns have been surprisingly similar regardless of which party controls the White House: Under Democrats, returns have averaged 8.8%; under Republicans, 8.6%.1

 

Stock market returns and presidential parties

On average, the stock market has returned 8.6% under Republican presidents and 8.8% under Democratic ones.

 

Returns are historical averages. Market performance is represented by monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, and Cowles Commission). Source: Fidelity Investments.

 

3. The economy is in an early growth phase, which historically has been good for stocks

Despite the ravages of the coronavirus on some sectors, particularly those associated with leisure and travel, most signs point to a healing economy. The US is in the early phase of the economic cycle, which has typically offered the strongest stock returns of all 4 phases of the business cycle.

 

Stocks have produced their strongest returns in the early phase of the economic cycle

https://www.fidelity.com/bin-public/060_www_fidelity_com/images/Viewpoints/MEI/election_risks_2020_chart_2.jpg

4. The secular bull market that started in 2013 may still be running

Sharp corrections are not unusual during long-running bull markets. Consider the 1950s and the 1980s: 2 lengthy bull markets that also had a deep correction in the eighth year.2 So if the current secular bull market continues, it would not be unprecedented.

 

Plus, we are not seeing any of the common warning signs of the end of a bull market—heavy inflows into stock funds, increased mergers and acquisitions, rising interest rates, weakening revisions to earnings, and a shift to defensive sectors as leaders in the market.

 

Deep corrections within long-term bull markets have happened before

 

https://www.fidelity.com/bin-public/060_www_fidelity_com/images/Viewpoints/MEI/election_risks_2020_chart_3.jpg

 

5. Expansionary fiscal and monetary policy—and low interest rates—are likely to continue

No matter which party wins the White House, spending from the federal government is likely to remain high. Spending is likely to be highest in a Blue Wave scenario where Democrats take control of the White House and both chambers of Congress. It's likely that either a Republican or Democratic president with a divided Congress would also pass stimulus bills, just not as expansive. Currently, markets seem to be pricing in the potential for a Blue Wave and a lot more spending, according to Timmer.

 

Expansionary fiscal policies could buoy stocks while the Fed absorbs the growing deficit by increasing the money supply through asset purchases. Such a fiscal/monetary cocktail may well be the most important driver for asset prices in 2021 and beyond, says Timmer.

 

In the short term, expect interest rates to stay low, providing opportunities for borrowers and challenges for savers. In this environment, you might want to consider refinancing your home if you can capture lower rates. If you’re saving for the long-term, there are higher yielding options than money market funds to consider as well.

 

But if deficits continue to grow, there could be risks of inflation longer term. To hedge against that risk, you might consider adding some inflation protection to your investment mix with such investments as commodities, real estate, gold and Treasury Inflation-Protected Securities.

 

6. Tax hikes haven’t tanked stocks historically

Some investors worry about rising taxes if the Democrats were to take over the White House and Congress. But history suggests that rising taxes do not mean falling stocks. In fact, in the 13 previous instances of tax increases since 1950, the S&P 500 has shown higher average returns, and higher odds of an advance,3 according to Fidelity's sector strategist, Denise Chisholm. That’s likely because tax hikes often coincide with periods of rising government spending, which tends to stimulate the economy.

 

7. There are things you can do to help mitigate the risk of rising taxes on your bottom line

Tax policy could change a lot or a little—or not at all. There's no way to know, so it’s important not to let potential policy changes drive investment decisions that might not be good for you long term.

 

But if you are concerned about rising tax rates, there are a few steps to consider taking this year, which may be good moves regardless of who wins, but even better if taxes rise next year. Among those to discuss with a financial advisor:

 

  • Converting a traditional 401(k) or IRA to a Roth
  • Bunch several years of charitable contributions into this year
  • Consider accelerating some capital gains
  • Exercising stock options
  • Revisit your estate plan

 

8. Regulation could shift, creating winners and losers

Democrats tend to favor tighter regulations on businesses, so a shift in leadership in Washington could hurt certain industries, while helping others.

 

From a tax and regulatory perspective, industries that could continue to benefit from a Republican White House’s focus on deregulation include those that have historically been highly regulated and that do most of their business domestically. Examples include fossil fuels, health care, defense, domestic banks, and financial services companies. A Democratic White House would likely be tougher on them.

 

Industries that could benefit from a Democratic administration could include those that generate a large part of their income internationally, those that would be unaffected by higher tax rates, and some that may benefit from new regulation. Some examples include utilities, renewable energy, infrastructure builders, global financials, and parts of the insurance industry.

 

If you are an active investor who tactically allocates among different sectors, you may want to make some adjustments if regulatory policy changes in Washington.

 

9. Don’t let emotions cloud your decision-making

It’s easy to let emotions about elections cloud your financial decision-making. But acting when you're fearful or anxious can lead to results that can undermine your long-term investing success. Some antidotes include:

 

  • Making sure you have an emergency fund so you can weather short-term market drops or unexpected financial needs.
  • Test-driving your investment plan under various scenarios can also help put the current uncertainties into perspective.
  • If you feel you can’t stomach as much risk as you thought, there are more conservative investment mixes that can help you reach your goals rather than going to cash and missing out on all growth potential.

 

Looking ahead

 

2020 has been a trying and tragic year. Particularly at uncertain times like these, having a financial plan can help you take control over your financial future. If you find it challenging to navigate market volatility or are concerned about the implications of future tax policies, let us help.

 

 

 

Income ranges for determining IRA eligibility change for 2021

 

WASHINGTON — The Internal Revenue Service announced cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2021 in Notice 2020-79, posted today on IRS.gov.

 

Highlights of changes for 2021

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2021.

 

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2021:

 

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000, up from $196,000 and $206,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500.
  • The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

 

Key employee contribution limits remain unchanged

The limit on contributions by employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $19,500.

 

The catch-up contribution limit for employees aged 50 and over who participate in these plans remains unchanged at $6,500.

 

The limitation regarding SIMPLE retirement accounts remains unchanged at $13,500.

 

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

 

Details on these and other retirement-related cost-of-living adjustments for 2021 are in Notice 2020-79, available on IRS.gov.

 

 

 

Here’s what taxpayers need to know about filing an amended tax return

 

If taxpayers discover a mistake on their tax return, this is not necessarily cause for concern. Most errors can be fixed by filing a Form 1040-X, Amended U.S. Individual Income Tax Return.

Here are some common reasons people may need to file an amended return:

 

  • Entering income incorrectly
  • Not claiming credits for which they’re eligible
  • Claiming deductions incorrectly

 

The IRS may correct math or clerical errors on a return and may accept returns without certain required forms or schedules. In these instances, there's no need for taxpayers to amend the return.

Taxpayers who do need to amend their tax return might have questions about how to do so. Here are some things they should know:

 

  • Taxpayers may now use tax software to file an electronic Form 1040-X. At this time, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically if the original 2019 tax return was also filed electronically.
  • Taxpayers who cannot or chose not to file their 1040-X electronically should complete a paper Form 1040-X.
  • If filing a paper 1040-X, mail it to the IRS address listed in the form’s instructions under Where to File. Taxpayers filing Form 1040-X in response to an IRS notice should mail it to the IRS address indicated on the notice.
  • Attach copies of any forms or schedules affected by the change.
  • File a separate Form 1040-X for each tax year. When mailing amended returns to the IRS, place each tax year in a separate envelope and enter the year of the original return being amended at the top of Form 1040-X.
  • Wait – if expecting a refund – for the original tax return to be processed before filing an amended return.
  • Pay additional tax owed as soon as possible to limit interest and penalty charges.
  • Taxpayers should file Form 1040-X to claim a refund within three years from the date they timely filed their original tax return or within two years from the date they pay the tax, whichever is later.
  • Track the status of an amended return three weeks after mailing using the Where’s My Amended Return? tool.

 

 

 

IRS union sues Trump over civil service executive order

By Michael Cohn

 

The National Treasury Employees Union has filed a lawsuit to block an executive order signed by President Trump last week that threatens to remove civil service protections from much of the federal workforce, allowing employees to be fired at will by supervisors and new employees brought in who support the politics of whichever administration is in power.

 

With little fanfare, Trump signed Executive Order 13597, which would create a new Schedule F that would reclassify federal employees and make it easier to hire or fire them, regardless of experience or behavior.

 

“Separating employees who cannot or will not meet required performance standards is important, and it is particularly important with regard to employees in confidential, policy- determining, policy-making, or policy-advocating positions,” said the order. “High performance by such employees can meaningfully enhance agency operations, while poor performance can significantly hinder them. Senior agency officials report that poor performance by career employees in policy-relevant positions has resulted in long delays and substandard-quality work for important agency projects, such as drafting and issuing regulations.”

 

The executive order is facing challenges from Democrats, who have introduced legislation to stop it, as well as the NTEU, which represents employees of the Internal Revenue Service, the Treasury Department and about 30 other federal agencies and departments. They fear that the order will be used to root out experienced federal workers who have traditionally enjoyed civil service protections by accusing them of being disloyal to the current administration. It could allow a revival of the so-called “spoils system” of political patronage that the merit-based civil service system aimed to eliminate back in the 19th century. The NTEU filed a lawsuit Monday in the U.S. District Court for the District of Columbia, naming as defendants Trump and Michael Rigas, acting director of the Office of Personnel Management.

 

The NTEU noted that Trump has also ordered agency leaders to identify which employees should be forced to lose the civil service protections they are entitled to under the law, enabling them to be hired or fired at will for purely partisan reasons.

 

“The president is attempting to run roughshod over the separation of powers and rewrite the law himself in a way that threatens a critical pillar of our democracy, and someone has to stand up to him,” said NTEU national president Tony Reardon in a statement Tuesday. “NTEU is proud to do so, with this lawsuit as well as supporting those in Congress who are pursuing legislative efforts to block the order.”

 

A group of House Democrats introduced a bill, known as the Saving the Civil Service Act, which would rescind Trump’s executive order removing civil service protections from an entire class of employees and prevent the use of government funding to implement it. The bill was introduced by House Majority Leader Steny Hoyer, D-Maryland, House Committee on Oversight and Reform chairwoman Carolyn Maloney, D-New York, and House Oversight and Reform Subcommittee on Government Operations chairman Rep. Gerry Connolly, D-Virginia.

 

“We commend Congress for quickly recognizing this executive order for the threat that it presents to the professional, merit-based civil service,” Reardon said in a statement. “We strongly support the Saving the Civil Service Act because it will safeguard the principle that federal employees swear an oath to the Constitution and work for the taxpayers, not the president.”

 

 

 

 

Tax implications in health care plan elections

By Roger Russell

 

One of the year-end routines faced by employees with employer-provided health care is the plan elections required every year. With the coronavirus pandemic still very much ongoing, these may be especially important this year — and they involve a number of important tax considerations.

 

Among the tax issues are the individual mandate and the constitutionality of the Affordable Care Act itself, according to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.

 

“The individual mandate was repealed in 2019,” he said. “It required a payment with a tax return for failure to maintain minimum essential health insurance coverage. And the Supreme Court will be reviewing a case that may determine if the repeal of the individual mandate invalidates the entire Affordable Care Act.”

 

In California v. Texas, a group of states are challenging the constitutionality of the ACA. The case is scheduled to be heard before the court on Nov. 10, 2020.

 

“For now, the ACA is still in place,” Luscombe said. “Open enrollment with the health insurance marketplace continues normally for 2020. The open enrollment period is from Nov. 1, 2020, to Dec. 15, 2020, with coverage starting Jan. 1, 2021. A special enrollment period with the health insurance marketplace may also be available for the remainder of 2020 for people who have special situations, such as lost health coverage, getting married, moving, or having a baby or adopting a child.”

 

 “The IRS allowed people to make mid-year changes to their plans due to the pandemic,” Luscombe noted. “But even if they did 2020 revisions to their health plans and FSAs, they must enroll again for 2021.”

 

Medicare, he noted, has a separate enrollment period from Oct. 15 to Dec. 7, and eligible low-income individuals may enroll in Medicaid or the Children’s Health Insurance Program, or CHIP.

 

The medical expense deduction, which for many years had to exceed 7.5 percent of adjusted gross income, was raised to 10 percent, but was set back at 7.5 percent for 2020, according to Luscombe. “However, it will revert back to 10 percent of AGI in 2021 unless Congress acts to change it,” he said. “A lot of people were postponing elective surgeries because they didn’t want to be in the hospital during the COVID-19 pandemic, But there could be an advantage to having the surgery done in 2020 in order to take advantage of the lower AGI threshold.”

 

“Of course, it’s possible that the low threshold could become one of the regularly expiring provisions that Congress always gets around to extending retroactively, so they might do that for 2021,” he added.

 

For those with a high-deductible health plan, including a marketplace plan, Luscombe recommends enrolling in a health savings account.

 

“They’re still out there, and are one of the best vehicles the IRS has to offer,” he said. “Not only does the holder get an upfront deduction, but there’s deferral while the money is in the account, and a tax-free withdrawal if the money is used for qualified medical expenses. For the 2020 plan year, the minimum deductible is $1,400 for an individual and $2,800 for a family.”

 

The other tax-saving vehicle, flexible spending accounts, are also widely used, Luscombe indicated. “They’re older than HSAs,” he said. “The money contributed to an FSA is not taxed, so the individual will save an amount equal to the taxes they would have paid. The drawback is a ‘use it or lose it’ feature which makes them less popular.”

 

 

 

 

Tips to help taxpayers avoid post-disaster scams

 

IRS Tax Tip 2020-142, October 26, 2020

The IRS reminds taxpayers that criminals and scammers often try to take advantage of generous taxpayers who want to help disaster victims. Everyone should be vigilant. These scams often pop up after a hurricane, wildfire or other disaster.

 

How the scams start

These disaster scams normally start with unsolicited contact. The scammer contacts their possible victim by telephone, social media, email or in-person. Scammers also use a variety of tactics to lure information out of people.

Here are some tips to help people recognize a scam and avoid becoming a victim:

 

  • Some thieves pretend they are from a charity. They do this to get money or private information from well-intentioned taxpayers.
  • Bogus websites use names that are similar to legitimate charities. They do this scam to trick people to send money or provide personal financial information.
  • Scammers even claim to be working for ― or on behalf of ― the IRS. The thieves say they can help victims file casualty loss claims and get tax refunds.
  • Disaster victims can call the IRS toll-free disaster assistance line at 866-562-5227. Phone assistors will answer questions about tax relief or disaster-related tax issues.
  • Taxpayers who want to make donations can get information to help them on IRS.gov. The Tax Exempt Organization Search helps users find or verify qualified charities. Donations to these charities may be tax-deductible.
  • Taxpayers should always contribute by check or credit card to have a record of the tax-deductible donation.
  • Donors should not give out personal financial information to anyone who solicits a contribution. This includes things like Social Security numbers or credit card and bank account numbers and passwords.

 

 

 

IRS beefed up ID theft filters for businesses, but still has work to do

By Michael Cohn

 

The Internal Revenue Service is improving its filters for detecting identity theft in business tax returns, according to a new report, but it’s still letting many potentially fraudulent refund claims get through.

 

The report, released Monday by the Treasury Inspector General for Tax Administration, pointed out that new fraud patterns are constantly evolving, so the IRS has needed to adjust its existing ID theft filters and continue to expand its detection processes to include more types of business tax returns.

 

Identity theft is more commonly associated with individuals, but it can happen with businesses as well. For example, an identity thief may file a business tax return using the Employer Identification Number of an active or inactive business without the business owner’s permission or knowledge of the owner to obtain a fraudulent tax refund.

For its report, TIGTA found the IRS is continuing to take various actions to improve its detection of business identity theft, including expanding the number of identity theft filters from 35 in tax-processing year 2018 to 84 in 2020. However, TIGTA believes further expansion of detection capabilities to include other types of business tax returns is still needed. For example, TIGTA found that 36 business return types with refunds issued totaling $10.5 billion in processing year 2019 weren’t evaluated for potential identity theft.

 

In a partially redacted part of the report, TIGTA’s review identified 11,908 returns of a specific type with refunds totaling almost $63.2 million for which the amount reported on the tax return differed from the amount reported to the IRS by a third party. However, the agency’s existing ID filters don’t check for this characteristic.

 

In addition, TIGTA’s review identified 3,283 tax forms of a certain type with refunds totaling almost $21 million that should have been identified by the IRS’s business identity theft filters but instead were excluded from evaluation by the filters. The IRS is also continuing to use processes that don’t protect potentially fraudulent refunds from erroneous release. TIGTA found that 1,966 of the 6,110 returns that the IRS’s filters had selected as potentially fraudulent had their associated refunds, totaling almost $110.4 million, erroneously released before a tax examiner confirmed the validity of the refund. The mistaken release of the refunds stemmed from a process that allows other functions at the IRS to release refunds associated with returns that the service's return integrity and compliance services function has identified and selected for review as potentially fraudulent.

 

To cap it off, once the IRS determines that a tax refund claim isn’t a case of identity theft, the service isn’t releasing the refunds on a timely basis. TIGTA’s analysis identified 821 taxpayer accounts for which the associated refund freeze was released 21 or more days after a tax examiner determined that the return was valid. The delays led to additional interest being paid by the IRS, totaling more than $1.3 million.

 

TIGTA made four partially redacted recommendations in the report to the IRS’s Wage and Investment Division commissioner to improve the identification of business identity theft. Those include expanding the business identity theft filters, revising the filters to use some piece of information that’s posted to the taxpayer’s account, and setting up procedures to make sure that tax refunds are promptly released once the IRS has determined they are not the result of identity theft. IRS officials agreed with all four of TIGTA’s recommendations and plan to take action on them.

 

“The detection of business identity theft can be challenging in that it shares many characteristics of noncompliance or attempts to defraud by individuals with legitimate authorization to use the businesses’ information,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Since 2015, we have improved and expanded our ability to detect both conventional fraud and identity theft fraud associated with the filing of business tax returns. As noted, the number of filters being used to detect business identity theft has expanded from 35 in 2018 to 84 in 2020. We also increased both the number of dynamic selection lists and our detection coverage to include additional business tax returns. The volume of filings for these business tax returns, processed in 2019, accounted for 82 percent of the refunds issued to businesses that year.”

 

 

 

IRS tightens settlement terms for micro-captive schemes

By Michael Cohn

 

The Internal Revenue Service is offering less generous settlement terms to participants in micro-captive insurance schemes as part of its clampdown on the transactions.

 

The IRS said Thursday it will be sending settlement offers with terms that are stricter than ones it offered last year under an earlier micro-captive initiative. The IRS has been focusing on cracking down on certain types of tax avoidance schemes, such as syndicated conservation easements and micro-captive insurance, while also stepping up tax enforcement efforts against holders of digital currencies such as Bitcoin and Ethereum, despite a decreasing number of IRS audits overall in recent years.

 

The crackdown isn’t entirely new. In 2016, the Treasury Department and the IRS issued Notice 2016-66, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.

 

A micro-captive insurance company is a small property and casualty insurance company owned by its members in a kind of self-insurance arrangement. Under section 831(b) of the Tax Code, micro-captives pay taxes only on their investment income, premiums are tax deductible and underwriting profits aren’t subject to immediate taxes.

 

More recently, the IRS sent 12 newly formed micro-captive examination teams to increase the number of examinations of abusive micro-captive insurance transactions. The IRS said it has decided to offer to resolve certain cases by requiring substantial concession of the income tax benefits claimed by the taxpayer, along with penalties that can be partly mitigated if a taxpayer can show good faith, reasonable reliance on an independent, competent tax advisor and if taxpayers can demonstrates they didn’t participate in any other reportable transactions.

 

“The IRS maintains a relentless agencywide commitment to combat abusive transactions” said IRS Large Business & International commissioner Douglas O’Donnell in a statement Thursday. “Our offer terms are only getting stricter; and taxpayers would be well advised to consult with an objective, competent advisor with the aim of getting out now and putting this behind them.”

 

This most recent settlement initiative is now limited to taxpayers with at least one open year under exam. Taxpayers who also have unresolved years under the jurisdiction of the IRS Independent Office of Appeals could also be eligible, but those with tax years involving micro-captive transactions docketed in Tax Court under the IRS Counsel's jurisdiction, in general, aren’t eligible. Taxpayers who don’t receive an offer letter are not eligible for the settlement.

 

The IRS noted that because the terms of the second settlement initiative reflect the IRS’s current settlement position, some taxpayers who received but rejected an offer under the first time-limited initiative may receive an offer under this second time-limited settlement initiative, but it will be under the new, stricter terms.

 

Taxpayers who receive offer letters under the settlement initiative, but who opt against participating in it, will still be audited by the IRS under its normal procedures. They face some dire potential outcomes, though, including, but not limited to, full disallowance of their captive insurance deductions, inclusion of income by the captive, withholding tax related to any foreign captives, and imposition of all of the applicable penalties.

 

Taxpayers who decline to participate in the settlement will have their full rights to an appeal, but the IRS Independent Office of Appeals is naturally aware of the settlement initiative, and the IRS warned that given the current state of the law, taxpayers shouldn’t expect to receive better terms from the Appeals office than those offered under this initiative.

 

 

 

10 estate plan pitfalls to avoid

Review your estate plan regularly to ensure it meets your needs.

FIDELITY VIEWPOINTS

 

Do you remember when you last reviewed your estate plan? If the answer is when you first signed the stack of documents at your attorney’s office, then you’re not alone. Many of us complete an estate plan and then fail to revisit it for years (and some never do).

 

It is important, however, to review a plan every so often due to ever-changing tax laws and major life events, such as a birth, marriage, divorce, or death. At a minimum, you should consider dusting off and revisiting your estate plan every 3 to 5 years, to help ensure alignment with current laws.

 

Below is a list of 10 common pitfalls of an outdated estate plan. If any of these apply to you, it may be prudent to meet with your estate planning team to review and, perhaps, update your plan.

 

1. Fiduciary follies: When the wrong executor or trustee is named

Do you know who your fiduciaries are? A fiduciary is someone who is appointed to take legal control over assets for the benefit of another person (the beneficiary). It is a fiduciary's legal responsibility to act in the beneficiary's best interest. Two types of fiduciaries often seen in estate plans are executors and trustees.

 

Executors are typically appointed in a will and are given control of assets during the probate process, until the assets are ultimately distributed to the named beneficiaries. Executors are responsible for collecting all the assets of the deceased, paying final debts, paying expenses, and filing any estate tax returns.

 

Trustees control the assets held within trusts, which may have been set up during a person's life, or at death under the terms of a will. While an executor's role is typically for a finite period, a trustee's role may continue either in perpetuity or until the trust is terminated. A key role of the trustee is to make distributions to a beneficiary while following the terms of the trust agreement. Executors and trustees generally bear responsibility for investments, accountings, and tax filings during their tenure.

 

Outdated estate plans often name fiduciaries or successor fiduciaries that may no longer be suited for the position. A fiduciary named years earlier may be too elderly, or even deceased. If a professional (e.g., attorney, CPA) is named, it is possible that they may no longer be practicing, or their professional relationship with the beneficiary may have since ended. Even named corporations, which we generally assume to exist in perpetuity, may have merged with or been acquired by another entity. And children who may have been too young to serve when the documents were created could now be capable of taking on the role of fiduciary.

 

Although fiduciaries are bound by certain standards of law, it is most important to name individuals you trust. Other important considerations are the age, maturity, and level of financial knowledge of the fiduciary. It is quite possible that the individuals who had fit most of these qualifications may have changed over the years and now no longer do.

 

Check to see who you have named as fiduciaries in your estate planning documents to determine whether you need to revisit these designations.

 

2. Your "little ones" aren't so little anymore

When a child is young, a key estate planning decision parents often make is to determine a guardian. If your child is now an adult, however, a guardian may no longer be relevant, but new considerations arise: Is your child married? Is your child financially responsible? Are you leaving assets to your children in a trust? Have your children had children of their own?

 

Many trusts are designed to distribute assets to children at certain ages, e.g., one-third at age 25, one-half of the remaining assets at age 30, and the remaining balance at age 35. If a child is now above one or more of these ages, they will receive distribution of part or all of the trust assets outright and free of trust upon the last to die between you and your spouse. Now that your child is older, you may feel differently about their ability to handle a large inheritance; for example, you may feel that large sums might not be spent in the most prudent manner if they are free of restrictions. Further, if the child is married, an inheritance can easily be commingled with the spouse's assets, possibly subjecting the distributed trust assets to equitable distribution upon a divorce. An inheritance free of trust will also be subject to any existing or future creditor claims. These are some of the factors you may wish to consider when reviewing your estate plan to determine if it still meets your needs.

 

Furthermore, in many cases, outdated estate plans are simply not consistent with current wishes or circumstances. For example, it is possible that one child within a family has been financially successful while another has not. When an estate plan is initially created, an equal amount of inheritance among children may have been the goal, but that may have changed over time. Also, in some cases, beneficiaries named on retirement accounts and life insurance policies may not be in line with the trusts created for children under a will or revocable trust. It is vital to revisit all the ways assets are being left to children, given their current age and maturity, to make sure the plan still matches the current intent.

 

Lastly, when children are minors, they do not typically need health care powers of attorney, living wills, or advance health care directives, since their parents or guardians are legally responsible for them. But once they become adults, they should consider having these important documents in their own right.

 

Periodically review the ways that assets will be left to your children, and encourage them to have the appropriate estate planning documents in place as they get older and their circumstances change.

 

3. Privacy please: HIPAA rights and when they should be waived

The Health Insurance Portability and Accountability Act (HIPAA) was passed in 1996, in part to establish national standards for protecting the confidentiality of every individual's medical records and other personal health information. As a general rule, health care powers of attorney, living wills, and advance health care directives should contain provisions waiving an individual’s HIPAA rights with respect to their health care representatives.

 

These stipulations allow physicians and other health care professionals to share a patient’s medical information with their representatives, empowering them to make informed health care decisions. Without these HIPAA authorizations in health care documents, doctors may be unwilling to share medical information, which may impede decision-making regarding a patient's care and any end-of-life wishes. These concerns would also apply to adult children who may have just graduated from high school or are attending college.

 

Take stock of your family's health care powers of attorney, living wills, and advanced health care directives, to ensure that health care representatives can make informed decisions regarding your family's care.

 

4. More money, more complexity: Wealth accumulation can create estate tax issues

Financial security is a goal for us all, but with wealth comes complexity. An increase in wealth not only typically causes an increase in annual income taxes, but it may also beget estate and gift taxes. Current federal law allows each citizen to transfer a certain amount of assets free of federal estate and gift taxes, named the "applicable exclusion amount."

 

In 2020, every citizen may, at death, transfer assets valued in the aggregate of $11.58 million ($23.16 million for married couples), free from federal estate tax. For gifts made during one's lifetime, the applicable exclusion amount is the same. Therefore, every person is allowed to transfer a total of $11.58 million during their life or at death, without any federal estate and gift tax. (This does not include the annual gift exclusion, which applies as long as each annual gift to each recipient is less than $15,000.)

 

Therefore, generally, only estates worth more than these amounts at the time of death will be subject to federal estate taxes. But this wasn't always so. From 2001 to 2009, the applicable exclusion rose steadily, from $675,000 to $3.5 million. 2010 was a unique year, in that there was no estate tax, but it was brought back in 2011 and then made permanent (unless there is further legislation) by the American Tax Relief Act of 2012 at an exclusion amount of $5 million, indexed for inflation. The Tax Cuts and Jobs Act passed in December of 2017 doubled the exclusion amount to $10 million, indexed for inflation ($11.58 million for 2020). However, the new exclusion amount is temporary and is scheduled to revert back to the previous exclusion levels in 2026.

 

Outdated estate documents may include planning that was appropriate for estates at much lower exemption values. Many documents have formulas that force a trust to be funded up to this applicable exclusion amount, which may now be too large or unnecessary altogether, given an individual’s or family’s asset level.

 

Take the time to review the formulas in your estate documents with your attorney and tax professional to determine whether the planning you have in place is still appropriate.

 

5. Getting out of Dodge: Changes in state residency

Where were you living when you drafted your most recent estate plan? Each state has its own estate and income tax laws, and it is important to plan appropriately. Furthermore, some states are common law property states and others are community property states. There are significant differences between them when it comes to transferring assets, and a document drafted in a common law property state might not be appropriate in a community property state.

 

As of 2020, 17 states and the District of Columbia* also impose some form of estate or inheritance tax. Additionally, each state has different exemption amounts, so it is vital to evaluate your current wealth and estate planning needs with your attorney, keeping both the federal and your state's exemption amounts in mind.

 

In addition, for many married couples in a state that imposes a state estate tax, this may have the effect of requiring payment of state estate tax after the first death, when none had been anticipated. Prior to 2001, because the "pick-up tax" was imposed only on estates that had to pay federal estate tax, estates below a certain threshold did not have to worry about such a tax. The threshold was the amount of the federal applicable exclusion amount. That is no longer the case. The practical effect of the difference between a state's exemption amount and the federal applicable exclusion amount is that certain estates will now be subject to a state estate tax, despite the fact that the estate is exempt from federal estate tax. In some situations, establishing a trust as part of an estate plan can help counter state estate tax implications.

 

Review your estate plan with your attorney and tax professional, with an eye toward reducing federal and state estate taxes, and make sure to reevaluate and potentially update your plan to establish residency in another state.

 

6. Potent portability: Unused portion of exclusion amount may now be transferred to second spouse

Portability rules allow a surviving spouse to take advantage of any unused portion of their spouse's applicable exclusion amount, provided that a federal estate tax return is filed to preserve the deceased spouse’s unused applicable exclusion amount within 9 months of their passing (15 months if an extension is granted).

 

Prior to portability, many estate plans included credit shelter trusts (CSTs). CSTs are sometimes referred to as bypass, family, or exemption trusts and are typically funded with assets having a value equal to the applicable exclusion amount ($11.58 million in 2020) of the first spouse to die. Assets placed in a CST can be excluded from the estate of the surviving spouse if the applicable exclusion amount of the first spouse to die is properly allocated to it. Prior to 2011, couples were required to use a CST to preserve the exclusion of the first spouse to die. With portability, this is no longer required. However, it should be noted that flexibility may be limited by the non-portability of the generation-skipping transfer (GST) tax exemption and at least some state estate tax exemptions, which still limit the time period in which the exclusion may be allowed. Although there may still be other reasons to use a CST, you might consider reviewing your estate planning documents with your attorney to determine whether allowing more flexibility in the funding of a CST, or the use of portability, is appropriate in your current situation.

 

As an alternative, for many people, disclaimer trust provisions allowing for this flexibility may be more suitable, considering the allowance of portability. Disclaimer trusts differ from CSTs in that they are optional, and are activated only after the first spouse's death at the election of the surviving spouse, depending on their current situation. There is flexibility in this type of planning because if there is no tax reason to use credit shelter planning, the spouse can simply receive all or a portion of the assets outright. This allows tax-planning flexibility without creating unnecessary complication. In addition, disclaimer trusts may be a good way to help reduce state estate taxes (if your state imposes one) and may help address uncertainty over the size of the marital estate, or concerns that the exclusion amount may decline in the future.

 

Although recent law allows the portability of the deceased spouse's applicable exclusion amount, there is no portability of the deceased spouse's generation-skipping tax exemption amount. A GST is the transfer of property, directly or in trust, to an individual who is 2 or more generations below the transferor. The IRS taxes these transfers at a rate of 40%. However, the IRS does give an exemption amount for the first $11.58 million (similar to the applicable federal exclusion amount). If you wish to use GST planning for your children so that your assets can benefit them during their lifetimes and then pass to your grandchildren without incurring estate tax at that time, you must preserve the GST exemption.

 

Given changes to portability, it makes sense to review your estate plan with your attorney and tax professional to ensure that it is still structured in the most efficient way.

 

7. Don't stop giving: Fulfilling philanthropic goals

For many, with success comes a desire to give back to the community or to causes they feel most passionate about. Individuals may contribute their time (volunteer work), talents (pro bono activities), or treasure (money or other assets). Many donate to religious organizations or to charities that support cancer research or that provide benefits to military veterans. Generally, people donate to charity because they care about these organizations, but they may also be seeking charitable deductions for income tax purposes. The bottom line is that philanthropy is positive for society, for the charity, and for donors' families.

 

Many of us, however, forget to include our important charitable causes in our estate plans, so our intentions are often not carried out after our deaths. Just like when we give to charity during our lives, there are many of the same benefits available when charitable giving is included in our wills. Everything from direct gifts to charities, to charitable trusts, to donor-advised funds, or to family foundations should be discussed and considered with your estate planning team. There are various ways to help you achieve your charitable goals while ultimately potentially reducing your estate taxes and increasing the amount you pass on to heirs.

 

Discuss your charitable intentions with your estate planning team to ensure that your philanthropic goals are included as part of your plan.

 

8. The lesser of 2 taxes: Income tax rates have increased relative to estate tax rates

Your prior estate planning may have emphasized federal estate tax savings because of the much lower applicable exclusion amount and traditionally higher federal estate tax rates. Changes in the federal tax law make it increasingly important to focus on the income tax consequences of estate planning in addition to the estate tax consequences. For estates still subject to federal estate tax, the federal estate tax rate is 40%. These rates must be compared with the top federal income tax rates of 37% on ordinary income and 20% on long-term capital gains and qualified dividends, plus a 3.8% Medicare net investment income tax.

 

Furthermore, trust income tax rates must be taken into consideration. Trusts are taxed at the highest federal income tax bracket starting at $12,950 in annual trust income. Therefore, when transferring assets to a trust for estate planning purposes, consideration should be given to the potentially negative consequences of higher income taxes. Outdated estate plans may not provide the flexibility required to shift the income tax burden from the trust to individuals in potentially lower tax brackets.

 

Revisit your estate planning documents and gifting strategies with your attorney and tax professional to determine whether they are still appropriate, considering the Medicare net investment income tax, the current federal estate tax rate, and the increased applicable exclusion amount.

 

9. Make sure life insurance policies are not on life support

Does your existing life insurance policy still make sense, both from an estate planning and a financial planning perspective? Is the policy performing as expected? Is the policy still competitive with what is available in the marketplace today? Do you own your policy outright or should it be owned by a trust? Many people purchase life insurance and continue paying the premiums for many years, even though their financial picture has changed dramatically.

 

Carefully review and assess the health of your life insurance and its ownership during your periodic estate plan review to make sure it is consistent with your financial and estate planning goals.

 

10. Help me help you: Talking with the next generation

Do your loved ones know what you plan to leave to them when you die? Do they know who to contact when something happens? Fewer surprises will make estate administration much easier when the time comes.

 

Consider drafting and regularly updating a letter of instruction to your children and fiduciaries. This letter should include an inventory of assets, and a list containing names, addresses, and phone numbers of your estate planning team. Easy access to this information may save your family from headaches down the road. Furthermore, having a discussion regarding your assets, your intentions, and your reasoning (especially when creating trusts rather than leaving assets outright) will help build relationships and avoid family discord, and may even reduce the likelihood of litigation down the road.

 

Additionally, make sure to give your fiduciaries the appropriate power to handle your assets. There has been a lot of change in recent years to laws regarding the administration of digital assets, such as email accounts, social media accounts, and song and picture libraries. You may want to create a list of your digital assets and name a successor to handle them. Proper documentation of succession planning for your digital assets is necessary because state and federal laws may prohibit others from accessing or using your digital assets without written consent.

 

Conclusion

Many estate plans no longer meet their original intent due to inattention and a lack of routine updating. Death, birth, marriage, divorce, and having children reach adulthood are some of the many reasons estate plans become outdated. Inevitable changes in laws and the tax code, not to mention changes to family and financial circumstances, further erode a plan’s effectiveness. Successful estate planning requires more than just having signed the initial documents: Your plan should evolve as your circumstances do.

 

 

 

Google to verify phone calls, and other tech stories you may have missed

By Gene Marks

 

The search giant will fight robocalls, Microsoft is upgrading Teams, and eight other developments in technology this past month, and how they’ll impact your clients and your firm.

 

1. Microsoft Teams gets major upgrades

Microsoft Teams is getting virtual coffee shops, breakout rooms, and custom layouts, and is launching new Cortana features for business users. Microsoft also recently announced new features for their Together Mode, which was designed specifically to address COVID-19 remote work meeting woes. While Together Mode is not new to Teams, some of the features — such as virtual conference rooms, auditoriums, and coffee shops — are. The features will use machine learning in order to instantly, accurately place people in the seats of the virtual spaces. Microsoft also shared that they are rolling out several Cortana features, including giving users the ability to use their voice to make calls, play emails, and navigate their inbox. Additionally, Teams Rooms devices will soon have Cortana to help create a more efficient touchless experience as people begin to return to offices. (Sources:The Verge,Tech Crunch)


Why this is important for your firm and clients: Will Microsoft Teams surpass Zoom? Well, if the software giant continues to innovate with new features like these as well as making the application more pervasive and user friendly, I can see this happening in the not-so-distant future. My advice to clients that are already using Office 365 is to go all-in on Teams and get training on other Office 365 apps that integrate with it.

 

2. Google will start verifying business calls to eliminate robocalls

Google will be rolling out a feature for Android phones that is going to assist real businesses in reaching out to make phone calls to their customers easier. With "Verified Calls,” when a business makes a phone call, their logo, name, and the purpose behind the call will appear on the screen of those receiving the call, as well as a symbol indicating the call was Google-verified. (Source:Tech Crunch)


Why this is important for your firm and clients: With the number of spam calls climbing 28 percent in 2019 as compared to the previous year, the feature will provide businesses that operate legitimately an avenue to provide their information with customers. I see a time when all businesses — yours and mine — will need to register with Google and other services so that our calls can be “verified” in advance. Sure, it’s an additional annoyance. But it’s nowhere as annoying as the dozens of robocalls I sometimes get in a day.

 

3. Square adds features that speed up payroll

Square recently announced that they are looking to make payroll simpler for businesses and their employees through their launch of two features. The first feature — “Instant Payments” — will allow employers to use the funds in their Square Balance to more quickly transfer paychecks into the accounts of their employees. This process will negate the traditional delay, which historically has taken up to four days. The second new feature — “On-Demand Pay” — will provide employees with the opportunity to access their money when they need it, even if that means immediately at the close of their shift. (Source:Pymnts)


Why this is important for your firm and clients: Remember when Square was just a mobile card reader? Yeah, those were simpler times. Now the company is stealthily expanding its reach into more accounting functions, like payroll. That’s good news for small businesses that are already using the platform and want an easier way to handle their finances.

 

4. Microsoft’s giant Surface Hub 2S will arrive in January

No, it’s not the laptop. It’s something much bigger. Microsoft announced that their 85-inch Surface Hub 2S will officially be available for purchase this coming January, and the option to preorder was made available last week. Priced at $21,999.99, the hardware was supposed to be released this past year. According to Microsoft, the Surface Hub 2S has assisted in bridging the gap between teams working remotely as well as doctor’s offices, hospitals, and schools. The bigger screen will also help in social distancing when people return to the office. (Source:The Verge)



Why this is important for your firm and clients: $22,000 may seem like a pretty steep price to pay for a computer but it really is more than that — it’s a giant display and central system for managing virtual conferences, and if you’re like most businesses, you’re going to be juggling a lot of meetings with employees and customers at home, in remote locations and in the office. If you want to make it a quality experience, you should be investing in quality technology and the Surface Hub has always received good reviews. This product is definitely geared towards corporate customers, but I’m betting many small businesses will find the investment worthwhile.

 

5. Synder integrates to boost ecommerce businesses

Synder — a fast-growing startup that developed a smart app for bookkeeping and financial management — has shared that they will be integrating with several e-commerce companies, including Ecwid, eBay, Shopify, and Amazon, to help ecommerce businesses automate bookkeeping and better manage accounts receivable. Snyder, which rolled out in 2017, is designed to assist businesses in streamlining transactions from their payment platforms into Zero or Quickbooks. (Source:PRNewsWire)


Why this is important for your firm and clients: The company says that with the integration, businesses selling online will be able to more efficiently navigate and operate their AR while automating their accounting processes, as well as instantly categorizing and recording their fees or sales into the bookkeeping software.

 

6. Fiverr expands business offering for easier remote work

Fiverr is a great place to find contract and outside help to accomplish online tasks. Last month the company said that they will be growing their offerings for businesses in order to help make remote work easier with so many at home during COVID-19. (Source: Pymnts)


Why this is important for your firm and clients: Their new platform was developed in order to help departments and teams work and collaborate with one another more seamlessly and balance overseeing projects involving freelancers. Fivver will allow users to have access to a curated list of freelance workers, budgeting and project management tools, as well as executive assistants.

 

7. Study says shorter content earns the most backlinks

The findings of a recent study have revealed that content that contains approximately 700 words gets more backlinks as compared to lengthier content. While the study did not analyze content from major news sources, researchers did analyze more than 5,000 articles, which included only articles that contained at least 25 backlinks. Findings also showed that how-to articles, lists/videos, and newsletters topped the list of the most shared content. (Source: Search Engine Journal)

Why this is important for your firm and clients: A backlink is when a well-known website links to something on your website and by doing so that gives you more credibility … and more attention from Google. Search engine optimization experts have debated over the years the perfect length of a typical blog, but now you’ve got some guidance. Shoot for 700 words.

 

8. Melio raised $144M to simplify B2B payments

B2B payments firm Melio, which assists small businesses navigate and manage payments due to suppliers, recently pulled in $144 million in order to help connect with a greater number of small businesses throughout the country. With a greater number of businesses moving to manage their finances digitally due to the coronavirus pandemic, the recent fundraising by Melio will allow expedited expansion in order to help more businesses. (Source: Business Wire)


Why this is important for your firm and clients: According to a statement from the company, small businesses typically use a variety of different tools to manage supplier payments, with almost half of B2B payments carried out with paper checks. Melio’s digital accounts payable and receivable dashboard “provides a single, integrated tool that allows small businesses to transfer and receive payments in a faster, easier way, giving oversight and control over cash flow, reducing or eliminating late payment costs, and giving businesses back valuable time.”

 

9. Google Cloud lets businesses create their own text-to-speech voices

Google announced that they have rolled out some new updates to their Contact Center AI platform, with the most notable feature allowing users to make a personalized text-to-speech voice. The idea behind the new feature is that companies will now be able to design a text-to-speech voice unique to their company or brand, potentially even using a recognizable spokesperson. To make this happen, businesses will be able to have the person with their chosen voice record a specific script given by Google, allowing Google to train their speech AI from those recordings. (Source: Tech Crunch)


Why this is important for your firm and clients: Where’s that guy who does all those Hollywood voiceovers? Sounds like a big opportunity for people with great lungs to sell their skills to businesses and brands looking to create their own, personal text to voice communications with their customers. Is James Earl Jones available?

 

10. Plastiq partners to offer FX credit card payments

Last month, credit card payment platform Plastiq shared that they are partnering with Silicon Valley Bank in order to collaborate on offering foreign exchange credit card payment capacities. The newest collaboration will enable businesses to use their credit card in order to pay suppliers who operate from other countries in that suppliers’ currency, rather than paying in U.S. dollars. The new FX card will also be accepted in places where typical cards are not. (Source: Plastiq)


Why this is important for your firm and clients: Plastiq is a client of mine, but their service is a good one for small businesses looking to do more overseas transactions and who don’t want to deal with the cost and complexity of arranging payments. Using Plastiq you can just use your credit card. They — and their banking partners — will take care of the rest. Sure, there’s a fee. But I think it’s worth it. And no, I received no payment for this.


Note: Some of these stories also appeared on Forbes.com.

 

 

 

Billionaire Robert Smith to pay $140M over tax probe

By David Voreacos, Neil Weinberg and Gillian Tan

 

Billionaire Robert Smith will pay about $140 million and acknowledge wrongdoing to end a four-year U.S. tax investigation involving assets held in offshore tax havens, people familiar with the matter said.

 

Smith, chief executive officer of the private equity firm Vista Equity Partners, informed some executives and investors of the pending agreement on Wednesday, the people said. Smith, 57, is cooperating with related tax investigations as part of a deal in which he will admit misconduct but won’t be prosecuted, they said.

 

The settlement, which doesn’t involve Vista, could be made public as early as Thursday, one person said. The settlement amount includes back taxes, penalties and interest, the people said.
 

Alan Fleischmann, a spokesman for Smith and Vista Equity Partners, declined to comment.

 

Smith, with a net worth of $7 billion, is the wealthiest Black person in America. He gained widespread acclaim last year when he vowed to pay off the student loans of the graduating class of Morehouse College.

 

His tax troubles arose from a $1 billion investment in Vista’s first fund two decades ago by an offshore foundation tied to Robert Brockman, a Houston software businessman, people familiar with the matter have said. The Justice Department and Internal Revenue Service have been investigating whether Smith failed to pay U.S. taxes on about $200 million in assets that moved through offshore structures tied to Brockman, those people said.

 

The same prosecutors who have pursued Smith turned their attention to Brockman, who has been the subject of a grand jury investigation in San Francisco into whether he committed tax and money-laundering crimes, according to the people familiar with the Brockman matter.

 

On Thursday, the U.S. attorney in San Francisco, David Anderson, and the IRS chief of criminal investigation, Jim Lee, will hold a news conference about a “new significant law enforcement action,” according to an advisory. A spokesman for the U.S. attorney declined to comment on the substance of the news conference or the Smith agreement.

 

Prosecutors in the Brockman matter, who were investigating “a major and very large tax fraud” in the U.S., believe $1.5 billion of revenue was fraudulently concealed, according to Bermuda court records.

 

Smith’s settlement includes a non-prosecution agreement that says he failed to pay about $30 million in taxes, with penalties and interest making up the remainder of the expected payout, according to a person familiar with a call that Smith conducted Wednesday. Smith said on the call that over three years, he failed to file accurate reports of foreign bank and financial accounts, known as FBARs, the person said.

 

Bloomberg News first reported the tax investigation into Smith in August.

 

 

 

Terms to help taxpayers better understand Individual Retirement Arrangements


Many taxpayers may have heard of Individual Retirement Arrangements, or IRAs, but some don’t know how IRAs help them save for retirement.


People can set up an IRA with a bank or other financial institution, a life insurance company, mutual fund or stockbroker. Here’s a list of basic terms to help people better understand their IRA options.

  • Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA.
  • Distribution. The amount that someone withdraws from their IRA.
  • Required distribution. There are requirements for withdrawing from an IRA:
    • Someone generally must start taking withdrawals from their IRA when they reach age 70½.
    • Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
    • Special distribution rules apply for IRA beneficiaries.
  • Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.
  • Roth IRA. This type of IRA that is subject to the same rules as a traditional IRA but with certain exceptions:
    • A taxpayer cannot deduct contributions to a Roth IRA.
    • For some situations, qualified distributions are tax-free.
    • Roth IRAs do not require withdrawals until after the death of the owner.
  • Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
  • Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees' retirement. The employee owns and controls a SEP.
  • Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.

 

 

 

People experiencing homelessness may qualify for an Economic Impact Payment


People experiencing homelessness may be eligible for a $1,200 Economic Impact Payment and $500 for each qualifying child under age 17. To get this payment, they must register with the IRS by Saturday, Nov. 21, 2020.

 

If someone’s income is below $12,200, or $24,400 if they’re married, they probably don’t file a tax return. That means the IRS may not have enough information to issue their payment.

 

To get an Economic Impact Payment this year, these individuals need to register by Nov. 21. They do this by using the free Non-Filers: Enter Payment Info Here tool. It’s available in English and Spanish.

 

People who don’t normally file a tax return may be eligible for an EIP if they:
 

• Are a U.S. citizen, permanent resident or qualifying resident alien

• Have a work-eligible Social Security number

• Cannot be claimed as a dependent of another taxpayer

 

To use the tool, a person needs
 

• Name, as it appears on Social Security card, for self and spouse, if they are eligible 
• A work-eligible SSN for self and spouse, if they are eligible 
• For each qualifying child, name, relationship and SSN or Adoption Tax Identification Number
• An email address to help create an account to use the Non-Filers tool
• A mailing address where they can receive the payment and a confirmation letter, which the IRS will mail within 15 days after issuing their payment
• Banking information, including routing and account numbers, if they want their payment by direct deposit
• An Identity Protection Personal Identification Number, if the IRS sent one in the past. If a person lost it, they can use the Get an IP PIN tool at IRS.gov to retrieve their number

 

The Non-Filers tool asks for a user’s license or state ID number to digitally sign the document. There are other ways to do this, so an ID is optional in the tool.

 

If someone wants their payment by direct deposit but doesn’t have a bank account, they can visit the FDIC website for help. The IRS will mail a payment to anyone who doesn’t give direct deposit information.


 
Other key points about Economic Impact Payments
 

• The IRS highly recommends the online Non-Filers tool for the fastest Economic Impact Payment.
• People who can’t access or use the tool should follow the steps in the Non-Filers tool section of the Economic Impact Payment FAQs. They should submit their information to the IRS by Nov. 21.
• If someone misses the Nov. 21 deadline, they can claim the payment as a credit on a 2020 federal income tax return next year.
• The payment is not taxable income and getting one does not affect eligibility for other benefits, such as the Supplemental Nutrition Assistance Program, unemployment benefits or other benefit programs.
• People can use the Get My Payment tool at IRS.gov within two weeks to check their payment status.

 

 

 

The unemployed trader who became a $700M Cum-Ex tax exile

By Ellen Milligan, Donal Griffin and Karin Matussek

  •  

When Sanjay Shah lost his job during the financial crisis more than a decade ago, he was one of thousands of mid-level traders suddenly out of work.

 

Shah didn’t take long to get back into the game, setting up his own fund targeting gaps in dividend-tax laws. Within a few years, he charted a spectacular rise from trading-floor obscurity to amassing as much as $700 million and a property portfolio that stretched from Regent’s Park in his native London to Dubai. He commanded a 62-foot yacht and booked Drake, Elton John and Jennifer Lopez to play for an autism charity he’d founded.

 

Fueling his ascent were what he maintains were legal, if ultimately controversial, Cum-Ex trades. Transactions like these exploited legal loopholes across Europe, allowing traders to repeatedly reap dividend tax refunds on a single holding of stock. The deals proved hugely lucrative for those involved — except, of course, for the governments that paid up billions. German lawmakers have called it the greatest tax heist in history.

 

Denmark, which is trying to recoup some 12.7 billion krone ($2 billion), or close to 1 percent of its gross domestic product, says the entire enterprise was a charade. Its lawyers are seeking to gain access to bank records that they maintain will prove that point. Authorities have now frozen much of Shah’s fortune and he’s fighting lawsuits and criminal probes in several countries. His lawyers have told him he’ll be arrested if he leaves the Gulf city for Europe, though he’s yet to be charged.

 

But in a series of recent interviews from his $4.5 million home in Dubai, Shah was unrepentant.

“Bankers don’t have morals,” the 50-year-old said on a video call. “Hedge-fund managers, and so on, they don’t have morals. I made the money legally.”

 

‘Allowed it’

Shah and the firm he set up — Solo Capital Partners LLP — are central figures in the Danish Cum-Ex scandal, in which he said his company helped investors to rapidly sell shares and claim multiple refunds on dividend taxes.

 

Authorities have been probing hundreds of bankers, traders and lawyers in several countries as they try to account for the billions of euros in taxpayer funds that they say were reaped. But Shah says he’s being made a “scapegoat” for figuring out how to legally profit from obscure tax-code loopholes that allowed Cum-Ex trades, named for the Latin term for “With-Without.”

 

“Prove that any law was broken,” Shah said. “Prove that there was fraud. The legal system allowed it.”

 

The Danish tax agency, Skat, says it’s frozen as much as 3.5 billion Danish kroner of Shah’s assets, including a $20 million London mansion, as part of a sprawling lawsuit against the former banker and his alleged associates.

 

The agency hasn’t seen “evidence that supports that real shares were involved in the trades relating to the dividend refunds reclaimed in the Shah universe,” it said in a statement. “It looks like paper transactions with no connection to any real holding of shares.”

 

Shah still reaps about 200,000 pounds ($250,000) a year from renting out his properties, he said, less than half of what he got before the arrival of COVID-19.

 

The former trader faces additional heat in Germany, where prosecutors are probing him as part of a nationwide dragnet that’s targeted hundreds of suspects throughout the finance industry.

 

Feeling robbed

In Denmark, the case against Shah has triggered public anger. The country, which is in the middle of an economic recession wrought by the coronavirus, claims it has been robbed.

 

“In a country like Denmark, and mainly in the times of COVID-19, it is of substantial importance,” said Alexandra Andhov, a law professor at the University of Copenhagen. The nation’s tax authorities have dealt with alleged fraud cases before but “not in the amount of $2 billion,” she said.

 

Shah appeared at ease and upbeat while outlining how he’d be arrested if he tried to fly home to London. Married with three children and based in Dubai since 2009, Shah has spent the past five years engrossed in legal papers and talking to his lawyers, he said. To the authorities trying to extract him from his exile, he has a piece of advice: know your Tax Code.

 

“It’s very nice to put somebody’s face on a front page of a newspaper and say, ‘Look at this guy living in Dubai, sitting on the beach every day sipping a Pina Colada while you’re broke and you don’t have a job’,” he said. “I would say look at your legal system.”

 

First strides

Shah is hardly the only person ensnared in the European Cum-Ex scandal. German prosecutors have been more aggressive than their Danish counterparts and have already charged more than 20 people. At a landmark trial earlier this year, two ex-UniCredit SpA traders were convicted of aggravated tax evasion.

 

One of them, Martin Shields, told the Bonn court that while he had made millions from Cum-Ex, he now regretted his actions.

 

“Knowing what I now know, I would not have involved myself in the Cum-Ex industry,” said Shields, who avoided jail time because he cooperated with the investigation.

 

A decade ago, Cum-Ex deals were wildly popular throughout the financial industry. Shah says he picked up the idea during his years as a trader in London for some of the world’s biggest banks.

The son of a surgeon, Shah dropped out of medical school in the 1990s and moved into finance. He first observed traders exploiting dividend taxes while at Credit Suisse Group AG in the early 2000s, a strategy known as dividend arbitrage. Will Bowen, a spokesman for the Swiss bank in London, said “the lawsuits referred to relate to a period after Sanjay Shah worked at Credit Suisse.”

 

Shah didn’t fully embrace Cum-Ex until he was hired by Amsterdam-based Rabobank Group several years later as the financial crisis was beginning to rip through the industry. Rishi Sethi, a spokesman for Rabobank, declined to comment on former employees.

 

Big ambitions

After being laid off, Shah says he received offers from several brokerage firms that included profit-sharing. But that wasn’t enough for him, so he set up his own firm.

 

“I don’t want to make a share,” he said. “I want to make the whole lot.”

 

That ambition was memorialized in the name that Shah picked for his company: Solo Capital Partners.

 

Shah said he had about half a million pounds when he started Solo. Within half a decade, his net worth would soar to many multiples of that. According to his recollection, JPMorgan Chase & Co. also played a pivotal role in helping him get started because they were the firm’s first custodian bank. Patrick Burton, a spokesman for the New York-based bank, declined to comment.

 

The scheme that Shah allegedly orchestrated was audacious. A small group of agents in the U.K. wrote to Skat between 2012 and 2015, claiming to represent hundreds of overseas entities — including small U.S. pension funds along with firms in Malaysia and Luxembourg — that had received dividends from Danish stocks and were entitled to tax refunds. Satisfied with the proof they received, the Danes say they handed over some $2 billion.

 

Luxury homes

But most of the money, authorities say, flowed instead directly into Shah’s pockets. The agents and the hundreds of overseas entities had merely been part of an elaborate web he’d created along with a series of dizzying “sham transactions” set up to generate illicit refund requests, according to the country’s claim in U.K. courts.

 

Starting in January 2014, more than $700 million allegedly landed in Shah’s accounts. He funneled his wealth into property across London, Hong Kong, Dubai and Tokyo, Shah said, amassing a portfolio that he put at about 70 million pounds. He bought a 36-foot yacht for $500,000 in 2014 and called it Solo before upgrading to a $2 million, 62-ft model, the Solo II.

Shah’s lawyers said in his latest filing in the London lawsuit last month that Solo — which went into administration in 2016 — provided “clearing services for clients to engage in lawful and legitimate trading strategies that were conducted at all times in accordance with Danish law.”

 

They said that dividend arbitrage trading is a widely known and “wholly legitimate trading strategy.” Shah’s lawyers are also contesting whether Denmark has jurisdiction to pursue its claim in the English courts.

 

It’s been five years since Shah learned he was facing a criminal probe, when the U.K. National Crime Agency raided Solo’s offices following a tip to British tax authorities from the company’s compliance officer.

 

Slightly bored

His lawyer at the time, Geoffrey Cox, told him in 2015 that he had nothing to fear and that it would all be over soon, Shah said. Cox, who would go on to become U.K. Attorney General and play a pivotal role during various Brexit crises last year, declined to comment.

 

But instead Shah’s legal problems are just beginning. A mammoth three-part civil trial covering Skat’s allegations against Shah will start in London next year. The accusations are also at the heart of a massive U.S. civil case targeting other participants in the alleged scam.

 

Criminal probes in Germany and Denmark are still rumbling on. While Shah said he hasn’t been contacted by the U.K. Financial Conduct Authority, the watchdog said in February that it’s investigating “substantial and suspected abusive share trading in London’s markets” tied to Cum-Ex schemes. A Dubai court threw out Denmark’s lawsuit against Shah in August, though it is appealing the decision.

 

Back in Dubai, Shah said the ongoing saga is starting to wear him down.

 

”It’s been quite nice spending time with the kids and family but now where I am, I’m just getting bored and fed up,” Shah said. “It’s been five years. I don’t know how long it will take for matters to conclude.”

— With assistance from Frances Schwartzkopff

 

 

 

SEC loosens auditor independence rules

By Michael Cohn

  •  

The Securities and Exchange Commission voted Friday to adopt amendments to its longstanding auditor independence requirements, relaxing restrictions on relationships between auditors and their clients as part of a deregulatory push by the SEC in recent years.

 

The SEC said the amendments to Rule 2-01 of Regulation SX would “modernize the rules and more effectively focus the analysis on relationships and services that may pose threats to an auditor’s objectivity and impartiality.” In announcing the changes, it said the SEC staff has found over the years that certain relationships and services would trigger technical violations of the independence rules and require potentially time-consuming reviews by audit committees of “non-substantive matters” and take time and attention from auditors, audit clients and audit committees away from other investor protection efforts.

 

Last December, the SEC proposed changes to the independence rules (see story). The final amendments approved Friday would change the auditor independence requirements to evaluate specific relationships and services that might threaten the objectivity and impartiality of auditors.

 

“Today’s amendments reflect the Commission’s long-recognized view that an audit by an objective, impartial, and skilled professional contributes to both investor protection and investor confidence,” said SEC chairman Jay Clayton in a statement. “These modernized auditor independence requirements will increase investor protection by focusing audit clients, audit committees and auditors on areas that may threaten an auditor’s objectivity and impartiality. They also will improve competition and audit quality by increasing the number of qualified audit firms from which an issuer can choose.”

 

The SEC outlined some examples of how the rules would change in certain circumstances, such as an audit partner who is paying off her student loans before starting her career at an audit firm. A different audit partner in the same city audits the lender that provided the other partner with her student loan. Under the earlier rules, the student loan of the audit partner who isn’t part of the audit would lead to an independence violation for the audit engagement of the lender. Under the amended rules, it wouldn’t result in an independence violation.

 

The changes are the most substantial changes in the auditor independence rules since 2003, although some changes were made last year in the definition of an “audit client” under the loan provisions of the rules to exclude some affiliated entities when deciding if a lender’s ownership interest in an audit client would impair an auditor's independence.

 

Two SEC commissioners, Allison Herren Lee and Caroline A. Crenshaw, criticized the move to relax the restrictions further in a joint statement Friday. “It is against this backdrop that the Commission relaxes auditor independence rules for the second time in as many years,” they wrote. “Among other changes, today’s rules replace a clear standard with one that provides auditors greater discretion when assessing their own independence and presents greater risk of mistaken or inconsistent application of that standard. What’s more, under the final rules, there is no mechanism for ensuring that the SEC and the investing public have visibility into how effectively auditors are making these assessments. And, as has too often been the case in recent years, these changes are disfavored by investors— those who actually rely on auditor assurances.”

 

The final amendments will alter the definitions of “affiliate of the audit client” and “investment company complex” to address some affiliate relationships, including entities under common control. They will also amend the definition of “audit and professional engagement period” to shorten the look-back period from three years to one year for U.S. companies planning to go public in weighing their compliance with the independence requirements.

 

Other amendments will add some types of student loans and consumer loans to the categorical exclusions from independence-impairing lending relationships.

 

The updates will also replace a reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence. They will also replace a transition provision with a new rule to provide a transition framework to deal with inadvertent independence violations that only come about as the result of a merger or acquisition.

Clayton defended the changes as modest and in the interest of the capital markets. “Our auditor independence rules are far-reaching and restrictive,” he said in a statement. “They should be, as even the appearance of inappropriate influence can undermine confidence. As markets evolve, however, far-reaching and restrictive rules can have unintended, negative consequences. In this case, the reach of our rules, particularly in the cases of a broad, diversified investment portfolio and certain consumer-finance transactions (such as student loans), is operating to limit auditor choice which, in turn, may adversely affect the important arms-length nature of the issuer-auditor relationship. Today’s modest and tailored amendments reduce or eliminate those adverse effects on auditor choice without detracting from the independence obligations of auditors and issuers. This type of retrospective review and tailored action is important to the continued effectiveness and efficiency of our rules.”

 

However, Lee and Crenshaw contend that the rule changes will compromise auditor independence and voted against them. “While it makes sense for us to assess how our rules are functioning from time to time and to recalibrate them as needed, we are concerned that the dial for auditor independence is turning in only one direction, and that is toward loosening standards and reducing transparency,” they wrote. “We cannot support introducing greater opportunity for error and uncertainty into auditor independence standards while decreasing visibility into how auditors are actually making these judgments. We respectfully dissent.”

 

 

 

Facing the tech problems of working from home

By Jeff Stimpson

 

Remote work schedules were omnipresent in practice management advice for years – until about six months ago, when the pandemic turned the notion into a mandatory business model.

 

The internet and other technology is about all that’s kept any portion of the economy goin

g since spring. But as usually happens with emergency methods, surprise problems cropped up.

“Switching to a predominantly remote work force is no simple task. One of the most important matters now, more than ever, is constant communication with colleagues and clients,” said Timothy Schuster, a senior manager in Top 100 Firm EisnerAmper’s Private Business Services Group, in Iselin, New Jersey. “Technology has helped … but it also comes with some challenges.”

 

So how did firms adjust?

 

Ready, set …

A big part of some smooth transitions began early. “Before going remote, our IT group tested the bandwidth of our systems to make sure that we could sustain nearly all of our employees working outside the office,” said Kimberly Dula, a CPA and partner at Top 100 Firm Friedman in Philadelphia.


EisnerAmper — “fortunately,” Schuster said — began switching to paperless, secure delivery of clients’ key documents before the pandemic. “We had a robust online client portal in place, which we have expanded the use of in recent months, both for document delivery and receipt. This helped immensely with the transition to remote working,” he said. “From a hardware standpoint, working mostly paperless requires multiple monitors, which many employees didn’t have at home. We helped fit out the home offices of our employees. USB monitors are a great option and don’t take up much room. We greatly increased our virtual meetings, using cameras, which adds to the sense of comradery. For internal communication, we also utilize instant messaging.”

 

Home is where the server is

“Our biggest problem has been the failure of the internet during storms,” said Michael Raiken, a CPA and senior tax manager in the Cranbury, New Jersey, office of Top 100 Firm Prager Metis. “Most of our homes don’t have backup systems and this has created days where work couldn’t be completed.”


“Even though we have updated our WiFi at home during the pandemic, we still have some outages. [Once] our wired connection wasn’t working and I had to reboot routers, check wires and TV connections for almost an hour until finally it all came back up,” said Brian Stoner, a CPA in Burbank, California. “This happens once in a while and is very annoying.”

 

The paper e-chase

Some have said the pandemic and work-from-home has been a long-awaited chance to finally get reluctant clients to go paperless. But the biggest tech problem for Enrolled Agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado, has been “really an introspection into human nature” — convincing established clients of the safety of encrypted file transfer portals and applications for e-signing. “My older clients prefer to conduct tax form review and signature in person and it’s been an uphill struggle,” he said.


Raiken said Prager Metis also had an issue with coordination with staff to ensure that packages to federal and state agencies are properly put together. “Working with administrative staff and coordinating when far away is difficult,” he said. “We have, however, been able to effectively use software to put the packages together virtually and send complete ones for mailing.

 

Zoom with a view

“The lack of in person meetings with clients is a detriment,” said Paul Gevertzman, a CPA and partner at Top 100 Firm Anchin in New York. “With all the problems my clients have been facing — business interruption, CARES Act matters, Paycheck Protection Program considerations and so on — the need for client meetings has increased exponentially. Virtual meetings have really helped, to a degree. It is much harder with newer clients that we’re still getting to know.”


“We’re finding that online meetings are taking much less time than when we meet with clients face to face,” added Bruce Primeau, a CPA and president of at Summit Wealth Advocates, in Prior Lake, Minnesota. “Not sure why exactly, as we’re typically covering the same amount of material regardless of meeting preference. Perhaps it’s less chit-chat at the beginning or end of, or more focus during, an online meeting.”

 

Time off

Remote workers are of course available pretty much 24/7, “a problem but also a benefit,” Anchin’s Gevertzman said. “Learning to shut off is paramount for good mental health — but within reasonable limits it can be helpful if something comes up that needs to be dealt with.


“A few days ago I received a call from a client asking if I was still in a software program on their site that I had access to,” he added. “I thought I had logged out but was still in the program so they couldn’t access what they needed to do. It was 10:30 p.m. Had my laptop not been in my remote office I would have had to consider whether I should drive into the office to log out … a minimum round trip of an hour and a half. Instead it was a minute-and-a-half trip upstairs to log out.”

 

Time to be tech-forward

“A firm needs to be flexible and ready,” said Friedman’s Dula. “A helpdesk that can remote in to someone’s computer and troubleshoot problems, access to IT team members at all times since traditional work hours don’t really exist in these circumstances, and equipment like portable scanners that allow employees to do almost everything as if they were in the office: all examples of what allows a firm to continue to service clients.”

 

 

 

Billionaire Robert Smith to pay $140M over tax probe

By David Voreacos, Neil Weinberg and Gillian Tan

 

Billionaire Robert Smith will pay about $140 million and acknowledge wrongdoing to end a four-year U.S. tax investigation involving assets held in offshore tax havens, people familiar with the matter said.

 

Smith, chief executive officer of the private equity firm Vista Equity Partners, informed some executives and investors of the pending agreement on Wednesday, the people said. Smith, 57, is cooperating with related tax investigations as part of a deal in which he will admit misconduct but won’t be prosecuted, they said.

 

The settlement, which doesn’t involve Vista, could be made public as early as Thursday, one person said. The settlement amount includes back taxes, penalties and interest, the people said.
 

Alan Fleischmann, a spokesman for Smith and Vista Equity Partners, declined to comment.

Smith, with a net worth of $7 billion, is the wealthiest Black person in America. He gained widespread acclaim last year when he vowed to pay off the student loans of the graduating class of Morehouse College.

 

His tax troubles arose from a $1 billion investment in Vista’s first fund two decades ago by an offshore foundation tied to Robert Brockman, a Houston software businessman, people familiar with the matter have said. The Justice Department and Internal Revenue Service have been investigating whether Smith failed to pay U.S. taxes on about $200 million in assets that moved through offshore structures tied to Brockman, those people said.

 

The same prosecutors who have pursued Smith turned their attention to Brockman, who has been the subject of a grand jury investigation in San Francisco into whether he committed tax and money-laundering crimes, according to the people familiar with the Brockman matter.

 

On Thursday, the U.S. attorney in San Francisco, David Anderson, and the IRS chief of criminal investigation, Jim Lee, will hold a news conference about a “new significant law enforcement action,” according to an advisory. A spokesman for the U.S. attorney declined to comment on the substance of the news conference or the Smith agreement.

 

Prosecutors in the Brockman matter, who were investigating “a major and very large tax fraud” in the U.S., believe $1.5 billion of revenue was fraudulently concealed, according to Bermuda court records.

 

Smith’s settlement includes a non-prosecution agreement that says he failed to pay about $30 million in taxes, with penalties and interest making up the remainder of the expected payout, according to a person familiar with a call that Smith conducted Wednesday. Smith said on the call that over three years, he failed to file accurate reports of foreign bank and financial accounts, known as FBARs, the person said.

 

Bloomberg News first reported the tax investigation into Smith in August.

 

 

 

Tax burden equal to 70% rate crushes Americans unable to pay

By Steve Matthews

 

Millions of low-income Americans are locked into poverty thanks to U.S. tax policy, Federal Reserve Bank of Atlanta researchers say.

 

About a quarter of lower-income workers effectively face marginal tax rates of more than 70 percent when adjusted for the loss of government benefits, a study led by Atlanta Fed Research Director David Altig found. That means for every $1,000 gained in income, $700 goes to the government in taxes or reduced spending. In some cases, there are no gains at all.

 

Poorer families may rely on Medicaid insurance, welfare payments, food stamps, housing vouchers and tax credits that are based on family incomes. Small increases in wages can bring big losses of benefits, reinforcing a negative cycle in which workers aren’t rewarded if they improve their skills or pay.

 

 “This is a perverse incentive that says you shouldn’t try to make yourself better,” said Atlanta Fed President Raphael Bostic, who is leading a virtual conference Thursday intending to focus attention on the problem. “They are not dumb. It’s on us to actually change those incentives so that people understand what the potential is and move forward towards opportunity.”

 

According to the U.S. Census Bureau, 34 million Americans lived below the poverty line last year.

 

The Atlanta Fed has developed online tools it calls “dashboards” that allow career centers across the U.S. to advise workers on how to increase their pay in ways that minimize or compensate for the loss of benefits. Career advisers can enter specific details — for example, a mother with three kids along with their various government programs — and suggest ways to make lasting pay gains.

 

The bank is in serious discussions with local partners in states throughout the Southeast, as well as New York, Connecticut, Colorado, Oklahoma and Wisconsin — sometimes in conjunction with the Richmond Fed and Kansas City Fed.

 

Broward College in Fort Lauderdale, Florida, has been one of the first to test a prototype of the tool. The school has 63,000 students, two-thirds of them Black or Hispanic, and about half lower income.

 

Generational poverty

“We think about the student who inevitably may make the decision unfortunately not to move up the economic ladder simply because of the benefits they may lose,” Broward President Gregory Haile said. “These are the kind of challenges that perpetuate generational poverty. That is inevitably the challenge we are trying to address, and the cycle we are trying to break.”

 

The Federal Reserve doesn’t have all the tools to fix the problem, but it’s important to highlight the issue as part of its congressional mandate to reach maximum sustainable employment, Bostic told the virtual conference Thursday. He said the Fed has become more focused on ensuring an inclusive economy that works for all Americans.

 

“The Fed is not afraid or unaware of these issues but rather is going to be out front and providing a leadership voice in trying to make that progress,” he said. “I know that has not always been the case. We have in the last several years — since I have been involved in this institution — evolved in a pretty significant way.”

 

While the median low-income American family may have a marginal tax rate of about 45 percent, there’s a large dispersion of experiences, depending on age, family size, location and benefits. Some families face an exaggerated problem — 70 percent tax rates or occasionally much more. Just $1,000 in higher pay for a single mother in Oregon, in one example cited in Altig’s research, would result in a devastating loss of $15,000 in housing subsidies.

 

The researchers characterize this consequence as a marginal tax rate because it leads to the government extracting more money from low-income workers through higher taxes or reduced spending on benefits. The richest 1 percent also face a high median lifetime marginal tax rate of roughly 50 percent, but they don’t face the housing, food and medical hardships endured by the poor.

 

The online tool suggests training strategies in some cases. For example, a nursing student may find that the extra time to study to become a registered nurse is far more beneficial than a smaller step to be a licensed practical nurse.

 

Some communities are putting up money to help as well. The East Lake Initiative, a community development organization in the eastern side of Birmingham, Alabama, recently began offering subsidies for food, utilities and child-care assistance to help offset loss of benefits.

 

“Most families reach out during a time of crisis,” said Pam Bates, executive director of the program. “Our aim is to help them move from crisis to thriving.”

 

Atlanta Fed’s Altig says the goal is to get other policy makers to step forward with funds when they understand how perverse the incentives for the poor are.

 

The research started two years ago as part of the Atlanta Fed’s greater focus on economic inclusion and mobility, an emphasis Bostic, the first Black Fed president in the central bank’s 106-year history, has pushed since taking over as president in 2017. It’s especially relevant because the Southeast lags the nation in income.

 

“These are crazy hurdles some people are facing,” Altig said. “This is a significant impediment to our capacity to move people into better and higher-paying jobs.”

 

 

 

Ted on Tech: Office in a box — what the post-COVID office looks like

By Ted Needleman

 

By now, some of you have already started to get back to your physical office, possibly part-time, or perhaps full-time. At the time I’m writing this, the pandemic seems far from over, though it appears we’re slowly coming to some kind of equilibrium. But exactly what we wind up with is unclear at the moment, and as far as I can see, it’s going to be a moving target for some time as we individually, and entity-wise, see what works and what doesn’t.

 

But one thing has emerged clearly from this crisis, and that’s the necessity of being able to perform client work and firm management and participation from pretty much anywhere.

 

There’s been a lot written about home offices. Some of that presupposes that you have room to replicate some facsimile of your “official” office. Others concentrate on detailing an “office-in-a-box” approach. This is one of those situations where there is no clear answer as to the best way to approach things — there’s no one-size-office-fits-all.

 

If being shuttered in my house for months on end is lucky, then I’m fortunate in that I’ve been working from home on and off for decades. And my office at home is in a really large room, with room in the basement for a server rack, several network attached storage (NAS) drives, and four networked multi-function printers.

 

If space is an issue, I have some suggestions:

 

The first step is to take a hard look at the way that you’ve worked in your “real” office prior to the start of the pandemic. A lot of the people I’ve talked with (mostly through email and videoconferencing) are trying to emulate the routines and workflows that existed before exactly. The simple fact is that you can’t. The world is a very different place now than it was six months ago, and it’s a sure bet that it will be even more different six months from now.

 

So before taking an inventory of what kind of hardware and software you really need to be efficient and effective, you should first examine the way that you worked before this craziness started. Then sit down and do an honest evaluation of what you need to accomplish now. Chances are, while the outcome might be similar or the same, the workflows probably won’t be, since it’s unlikely that you’ll have access to all of the resources you had before. Once you have your work plan documented, make notes next to each workflow item listing what kind of hardware software you need to achieve those outcomes.

 

Don’t skimp

During times like these, it’s normal to try and curb spending, but if the lack of resources has an impact on your efficiency and ability to get work done, it might be false economy. Here are a few items you might consider upgrading or acquiring:

 

Two monitors: I’ve written about this before, but it’s worth mentioning again. If you have the room for a second display, most people see an immediate improvement in their efforts when one is installed. This holds true even if your primary PC is a laptop. There are lots of 15-inch USB displays available. Two that I have here are the Lenovo ThinkVision M14 (14-inch display) and Viewsonic TD1655 (16-inch display). Neither is inexpensive, but it’s worth it to have the dual display capability when I need to use my laptop. Both of these models use USB-C and are powered through the USB cable. And for some of the tasks I need to accomplish, having the touchscreen on the Viewsonic is a real pleasure.

 

Large monitor and external keyboard for your laptop: If you have the room, you’ll find it much easier to work if you attach a standard-size keyboard and a display of 22-inches or larger to your laptop if that’s your production PC. You might be comfortable using the laptop’s keyboard, but the large display should improve your efficiency and eliminate a lot of eye strain.

External storage: A fair number of people I talked with got caught flat-footed and were unable to reach their files when shelter-in-place was established. There’s no excuse for this. At a minimum, your work PC should have been set up for Windows Remote Desktop (I don’t know if there’s something similar for Mac users). It’s something that should be installed on any PC where you have files critical to you to accomplishing a task. You should also consider saving files both locally on the PC you work on, and in the Cloud. Google Drive, Microsoft OneDrive, Dropbox, Box, and many other vendors offer this kind of storage. Chances are you’ll have more files than can be stored with the free versions of these Cloud repositories. If so, pay for the extra storage. You’ll be glad you did the first time you realize you don’t have a critical file locally.

 

Adding external storage via a USB drive or NAS, and having a second PC or laptop that’s a clone of the production PC you use is also a good idea. I’ve used both Acronis and Zinstall to replicate my production PC on an inexpensive Intel NUC. It’s a pain, and I have to admit that I don’t do this as often as I should, but having files and applications on several PCs has saved me on more than one occasion.

 

No one can foresee the future, and a lot of us, myself included, were caught by surprise when things started to fall apart. But having gone through a sudden major crisis will, hopefully, put you in a position to see where you are vulnerable. It might seem like closing the barn doors after the horses have bolted, but understanding the way that you work and interact with clients, and the resources you need to do so, is always a good thing.

 

 

 

Could you be a target for cybercrime?

Understanding the potential threats can help keep your online accounts safe.

FIDELITY VIEWPOINTS

Key takeaways

  • Understanding the many forms of cybercrime may allow you to better defend yourself.
  • Use 2-factor authentication for all online financial accounts.
  • Maintain updated industry-standard operating systems and software.
  • Do not use public Wi-Fi for your finances or other sensitive items.

 

You've likely spent a good deal of time thinking about investment risk. But have you stopped to think about more personal security issues, such as the safety of your online financial transactions and information stored on your computers? While most people recognize that online fraud or cybercrime is a potential threat, few know how or why they may be at risk. Cybercrime can take many forms, and understanding who the enemies are and how they commit crimes may allow you to better defend yourself.

 

The "Bad Guy"

Economic cybercriminals pose the greatest online risk to your family's personal financial data and assets. Make no mistake, many of these thieves are highly skilled and sophisticated. They may be individuals or coordinated groups that use technology to steal. For most of us, cybercrime can best be described as an extension of traditional criminal activity focused on personal financial data and monetary theft.

 

How do cybercriminals operate?

 

Indiscriminate targeting

In some cases, cybercriminals cast a wide net with "phishing" scams, among others, and hope the sheer quantity of potential victims will yield sufficient economic benefit (see "The makings of a cybercrime," below, for more details on how cybercriminals attack).

 

Specific victim targeting

A growing and more concerning trend is the specific targeting of high-net-worth individuals. In many of these cases, criminals spend a great deal of time and effort identifying a worthwhile target and then developing a victim profile based on public and private information—such as property records, credit information obtained via hacking, and posted details on social networks—with the goal of stealing assets from financial accounts.

 

Although the actual criminal act can take several forms, the basic steps are often similar. Below is a relatively common scenario:

  • Step 1: The thief sends an email with a link or attachment to the victim that appears to come from a known party. The targeted victim then clicks the link or attachment, which includes malicious software (malware) that infects the victim's computer.
  • Step 2: The thief uses installed malware to steal login credentials to the victim's financial accounts or to remotely control the victim's computer. This will generally allow the thief to log in as the victim.
  • Step 3: With access to accounts, the thief changes the victim's profile at the financial institution and/or impersonates the victim and moves money to criminal accounts at a different institution.

 

That's the bad news. The good news is that with some simple steps, you can improve your defenses and reduce your vulnerability to this type of crime.

 

Steps you can take to help keep your online accounts safe

 

1. Use 2-factor authentication and strong, unique passwords for each site

Treat your computing devices as you would your front door—restrict access and use tough security measures. Passwords are the keys to your online financial information. If cybercriminals find them, they can unlock the doors to your bank accounts, investment accounts, and your personal information. Unfortunately, a significant amount of malicious software trolls the internet looking specifically for account credentials (IDs and passwords). With an inadvertent click on what appears to be a legitimate link or the opening of an attachment designed to look legitimate, this software can be loaded on your machine and be ready to take your "keys."

https://www.fidelity.com/bin-public/060_www_fidelity_com/images/Viewpoints/WM/cyber_security_2017_info1.jpg

 

Go for 2
 

Adding an additional layer of security when you access your accounts, called 2-factor authentication, is a strong defense against this type of attack. Fidelity and many other financial firms now offer 2-factor authentication. It requires you to enter a unique security code, randomly generated and sent to your phone or other mobile device, in addition to your standard login. While not completely foolproof, 2-factor authentication raises the bar for cyberattackers trying to access your accounts. You might also consider it for nonfinancial sites—Google, Apple, Microsoft, Facebook, Amazon, and Twitter all offer 2-step authentication options.

 

Go long and stay strong
 

You've probably heard this before, but it bears repeating: Never use names, birth dates, Social Security numbers, or any personally identifiable letters or numbers as your password. Use a different password for every application and website and change them often. Why? The dangers of password reuse. Every year there are data breaches and more sets of credentials (user IDs and passwords) leaked onto the internet. It is common practice these days for criminals to collect these credential dumps and try these user IDs and passwords at financial sites, email providers, mobile phone providers, social media sites, and others. If a Fidelity customer were to use the same password here that they used on another account, and that other account was breached, their Fidelity account could be at risk.

 

What constitutes a good password? The most important factor is length (at least 12 to 14 characters is best), but complexity also makes passwords more unique. Use a combination of letters, numbers, and special characters and stay away from dictionary words or common combinations of words. It's also best to avoid common substitutions within words, like replacing the letter "o" with a zero. It's just too obvious. A string of uncorrelated words with numbers and special characters is best. Importantly, when selecting a password, don't rely on free password strength checkers—they often miss the mark.

 

Install a password manager
 

These days, most of us have dozens of passwords covering multiple devices and everything from social media to subscription services, e-commerce, banking, and Wi-Fi. Remembering all these passwords, and changing them frequently, just isn't sustainable. Fortunately, there's an app for that. Password manager apps generate and store all your passwords in a secure environment. They'll even auto-fill login information for stored sites. Many now sync your passwords across all your devices and automatically generate new ones on a regular schedule. The cost of state-of-the-art password managers is negligible—especially when compared with the convenience and security they provide.

 

2. Install industry-standard systems and software, keep them up to date, and perform regular backups

 

One of the smartest things you can do to keep your financial information safe is to use modern, industry-standard operating systems and keep them up to date. Credible vendors have teams of cybersecurity specialists dedicated to fixing vulnerabilities in their current systems, and they are always on the lookout for new ways cybercriminals can hack into their products to access users' computer files or install malicious software.

https://www.fidelity.com/bin-public/060_www_fidelity_com/images/Viewpoints/WM/cyber_security_2017_dictionary.jpg

 

Updating your systems is easier than it used to be
 

Today, most operating systems let you set your update preferences to automatically install patches as soon as they are available. That goes for software too, including antivirus protection. Don't forget to update your mobile phones and tablets, and the apps installed on them. You can set update preferences to do this automatically, but many devices need to be plugged into your computer for a complete upgrade. It's a good idea to connect your mobile devices to your computer at least once a week so these updates can be downloaded and installed properly.

 

You can never have too much backup
 

Backing up your data is good system hygiene. It prevents your information from being lost forever and immunizes you from ransomware attacks. In this increasingly common scheme, criminals lure you into clicking an email link that downloads malware and blocks your access to the computer. The perpetrators can hold your hard drive hostage, demanding a hefty ransom to unblock it. If your system data is backed up elsewhere, it eliminates any leverage the scammers have, neutralizing their threats.

 

Backups are most effective when done in a continuous, real-time environment. Savvy users employ redundant methods—typically a USB-connected external storage device in tandem with an encrypted cloud-based service. External storage offers more immediate data retrieval, while cloud-based services can store much more data. Also, in the event of a flood or fire, both the computer and external storage device may be lost, but offsite backups to a cloud-based service would be safe.

 

Don't forget to include mobile devices in regular backups. This can be done via a cloud-based service, but a full backup may require connecting to a computer. By syncing up your photos and home movies to your computer, they will then be included in regularly scheduled backups, keeping them secure.

 

3. Use caution when linking to financial accounts or e-commerce sites through email

 

Cybercriminals are getting smarter about making their phishy emails look legitimate. These emails mimic those of financial institutions, complete with logos and convincing signature lines. Searching Google and social media sites makes it easy to personalize these emails with your name and subject lines like "Your recent transaction with us." All of this is designed to lower your guard so you'll be more apt to click a link to a fraudulent version of your provider's website. This allows the scammers to download malicious software onto your computer or gain access to your passwords and usernames.

 

The best offense is a good defense
 

Use caution when linking to your financial institution via email. Instead, go directly to your provider's website by using a link you've saved in your "Favorites" menu. That way, you'll be sure you arrive at a legitimate website. Always look for the "https" prefix in the site's address. This indicates that the connection to the site is encrypted to protect your sensitive data from prying eyes.

 

4. Always access your accounts from a secure Wi-Fi location

 

Your home Wi-Fi network comes with built-in security, but it's not foolproof. Your network provider supplies you with a router ID and password, but these are default settings. Cybercriminals know the defaults for major network providers. If you're using these settings, your "secure" home Wi-Fi network may not be as secure as you think.

 

Home networks now connect computers and smartphones to thermostats, TVs, refrigerators, and residential security systems. Each device is a potential weak spot in your Wi-Fi network. As your home becomes more dependent on the internet, so does your exposure to a network breach.

When setting up your home network, consider changing the default network ID and passwords. Consider installing an intrusion detection or intrusion prevention system, as well as an applications-based firewall, to further secure your network.

 

Beware of public Wi-Fi
 

Everyone loves free Wi-Fi, but unsecured public wireless access points are easy to intercept, providing an opportunity for attackers to snoop on your online activity. A safer alternative is to use only secure Wi-Fi networks. If you use your laptop or mobile devices while traveling, purchase a subscription to a paid hotspot provider in which the networks are password protected and have additional levels of security.

 

5. Consider using a dedicated device for online banking

 

One of the best ways to secure your online financial information is to dedicate one device exclusively for banking and financial use. Many cyberattacks come from malware installed while you're web surfing and reading emails. Eliminating those activities from a dedicated banking computer goes a long way toward keeping your financial information out of harm's way.

 

Help us help you
 

A dedicated banking device also helps financial institutions keep your accounts secure. Most, including Fidelity, monitor client accounts for fraudulent logins from unauthorized computers and will alert you if there is suspicious activity in your account. When Fidelity surveyed client login patterns, we found many users logging in from multiple devices. One or two were common, but some clients routinely logged in from a seemingly random assortment of systems, making it difficult for an institution to distinguish a legitimate login from a fraudulent one. By using one device for all transactions, an illegitimate login stands out, and the institution will be able to move quickly to alert you and secure your account.

 

6. Understand your computing environment and consider whether you need help

 

If you have a complex computing environment, a comprehensive cyber-risk assessment may be an appropriate step in protecting your personal information. Individuals with complicated online footprints may want to consider implementing additional systems (e.g., intrusion prevention and detection, firewalls).

 

Because cyberthreats evolve almost as fast as technology itself, consider retaining a firm to provide ongoing system surveillance, support, and maintenance. These services include everything from monitoring your home internet traffic and blocking outside threats, to educating family members about smart social media practices, safe web surfing and e-commerce protocols.

 

A good risk assessment will be specific to each person and should consider questions like:

  • How many computers, mobile devices, tablets, TVs, home security systems, and appliances are connected to your home Wi-Fi network?
  • Are they shared across personal and home office use?
  • Do non-family members regularly in your home have access to your Wi-Fi network or computing devices?
  • What backup procedures are in place for each device?
  • Are you or other household members active on social media like Facebook, Twitter, or Pinterest?

 

Conclusion

 

No one wants to spend time thinking about all the bad things that can happen, but it's important to understand potential threats to your assets and take measures to eliminate them. When it comes to protecting your financial accounts from cyberthreats, practicing good system hygiene and making a few changes in your user habits will significantly improve your online security. Clients can play a key role in helping Fidelity detect fraud. They can help us help them by maintaining a general awareness of their accounts, including staying alert to emails regarding password resets and account changes, and periodically logging in and checking for unusual transactions and activity.

 

Fidelity uses sophisticated security measures to protect our customers. We also make many additional security tools available for customers to utilize, including 2-factor authentication and transaction alerts. Of course, we also provide a Customer Protection Guarantee for fraudulent activity. Make sure to visit Fidelity's online customer security site to explore some of these features, and learn more about what Fidelity is doing to help keep your assets safe.

 

 

 

Social Security benefits going up 1.3% in 2021

By Michael Cohn

 

The Social Security Administration said Social Security and Supplemental Security Income benefits will increase 1.3 percent in 2021, providing some relief next January to 64 million Social Security beneficiaries and 8 million SSI recipients in the midst of the novel coronavirus pandemic.

 

The increase is part of the Social Security annual cost-of-living adjustment, or COLA, in response to inflation and changes in the Consumer Price Index. The COVID-19 pandemic has affected the supply chain of many consumer goods such as food and disinfectant supplies, and many consumers have seen steep increases in the prices of staples such as meat and eggs this year.

 

Other adjustments that take effect in January are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax will increase to $142,800 from $137,700.



Social Security and SSI beneficiaries can expect to be notified by mail starting in early December about their new benefit amount. Most people who receive Social Security payments will be able to view their COLA notice online through their personal “my Social Security” account, which they can access at www.socialsecurity.gov/myaccount.

 

For some examples of how the changes may affect them, see the fact sheet from the Social Security Administration.

 

Information about Medicare changes for 2021 will be announced later at www.medicare.gov. For Social Security beneficiaries receiving Medicare, Social Security won’t be able to compute their new benefit amount until after the Medicare premium amounts for 2021 are announced. Final 2021 benefit amounts will be communicated to beneficiaries in December through the mailed COLA notice and my Social Security's Message Center. For more information, visit www.socialsecurity.gov/cola.

 

 

 

Trump vs. Biden: Whose tax plan makes for good tax law?

By Alicyn McLeod

 

What defines good tax law? Taxpayers have their own thoughts on this. As a tax professional, I certainly have my own opinions. For researched and broad-reaching direction on this, we can look to a few sources, including the American Institute of CPAs guidance. The AICPA describes an effective tax system as one that is fair/equitable, neutral, simple/certain, and economically efficient:

 

1. Fair/equitable: Compare the tax returns of two taxpayers with the same income. Would they show the same tax liability? From a fairness standpoint, one could argue they should. If one taxpayer’s income is higher than another’s, does that taxpayer pay more taxes? Again, if the tax rules in place are equitable, one would expect so.


2. Neutral: Ideally, taxes should be neutral, meaning they distort behavior as little as possible. Are tax laws influencing your decision to donate to charity or buy a new home? Are you moving to a new state for tax reasons? If so, these tax laws aren’t neutral.


3. Simple/certain: For most people, the U.S. Tax Code is a foreign language. The concepts of simplicity and certainty assert that taxpayers should be able to easily understand tax rules and apply them consistently. Taxpayers should have a clear idea of how and when a tax is paid. They should have confidence that a tax has been calculated correctly. The more complicated and vague tax laws are, the less certainty taxpayers have that their tax liabilities are accurate.


4. Economically efficient: Effective taxing regimes don’t obstruct economic growth. This concept can be harder than the others to pin down. Whether a tax law is fair, neutral or simple is fairly easy to measure. Just ask your tax advisor! However, whether a new tax law will allow for the economy to “do its thing” must be modeled and, well, guessed. Furthermore, because nothing happens in a vacuum, the historic impact of a particular tax policy may not always be clear either.

 

This article looks at a few key components of President Donald Trump and former Vice President Joe Biden’s tax positions from the perspective of whether their ideas meet the “good tax law” tests of being fair, neutral, simple and economically efficient. (The Libertarians and the Green Party also have their take on taxes, but, well, I had to stop somewhere.)

 

Individual tax rates

Currently, the top tax rate for ordinary income, such as wages, is 37 percent. Biden would like to increase that back to the pre-2018 rate of 39.6 percent and have this rate apply for individuals with taxable income over $400,000. Trump would like to keep the 37 percent rate and has hinted at lowering the 22 percent rate for middle-income taxpayers to 15 percent or restructuring tax brackets so more taxpayers fall into the lower brackets.

 

Biden’s plan prioritizes fairness. It justifies a rate hike for high income earners based on their ability to pay. This can distort behavior, however, as those in the top tax bracket look for other ways to lower their tax bills. As we don’t have much detail for Trump’s ideas on this, moving more taxpayers into lower brackets may or may not demonstrate fairness depending on how “middle-income” is defined.

 

Capital gains

Under current law, certain dividends and long-term capital gains from investments held for more than one year are taxed at lower rates than ordinary income. The top tax rate for long-term capital gains is 23.8 percent when including the net investment income tax. Trump has expressed interest in lowering the top rate to 15 percent or indexing the rate for inflation. Biden, on the other hand, wants to tax long-term capital gains at ordinary income rates for those with taxable income greater than $1 million.

 

For many, Trump’s ideas seem unfair because they can result in situations in which a taxpayer with higher investment-related income is paying less federal taxes than a taxpayer with lower non-investment income, such as wages. Biden’s plan tries to address this, at least with high income earners, touching on the good tax law components of neutrality and simplicity. However, it’s important to note the original intention of taxing this type of income at lower levels, dividends at least, is because this income has already been taxed at the corporate level before it makes its way to shareholders. In other words, the lower rate helps minimize overall double taxation — a potential impediment to economic efficiency.

 

Itemized deductions

The Tax Cuts and Jobs Act of 2017 significantly increased the standard deduction while limiting certain itemized deductions. These changes are currently scheduled to expire at the end of 2025. If re-elected, Trump would like to make them permanent. Under Biden’s tax plan, the value of itemized deductions would be capped at 28 percent for taxpayers with incomes over $400,000.

 

The increased standard deduction was a step toward a simpler tax system. It eliminated the need for many taxpayers to calculate various itemized deductions. On the other hand, many individuals with large mortgages and significant charitable giving continue to benefit from itemizing their deductions. In other words, with the standard deduction so much higher, continuing to keep itemized deductions in the Tax Code disproportionately benefits those who have higher levels of deductions to itemize. Between pre-TCJA law and TCJA, the percentage of individuals itemizing their deductions dropped from 31 percent to 14 percent, with nearly all higher earners continuing to itemize while many middle earners stopped. This situation runs contrary to the effective tax principles of equity and, to some extent, neutrality. Biden’s plan seems to recognize this by capping the value of itemized deductions at 28 percent for higher earners.

 

Child tax credit

Under current federal tax law, a $2,000 child tax credit for children under age 17, plus a $500 credit for certain other dependents, are available for many taxpayers. Biden supports the expansion of the child tax credit as outlined in the original version of the HEROES Act, recently revised, that passed the House earlier this year. This would increase the child tax credit to $3,000 per child for children ages 6 to 17 and $3,600 for children under age 6. Biden also would like to make the credit fully refundable. Trump hasn’t proposed any major changes to the current child tax credit rules.

 

Some argue that the child tax credit is unfair since it treats taxpayers with children differently than those without children. From that perspective, Biden’s plan would be lower on the fairness scale. However, note that this credit is a significant benefit for lower income families, whose ability to pay taxes is disproportionately reduced by the expense of raising children as compared to higher-income families. In other words, the child tax credit could instead be viewed as a way to remove some of the costs associated with child rearing from the equation and put families on more of an equal ground for tax purposes than taxpayers without young children. Whether this credit and its expansion are seen as fair will depend on your perspective.

 

Deduction for pass-through income

If you own a pass-through business such as a partnership or S corporation, you may benefit from the 20 percent qualified business income (QBI) deduction that was part of the TCJA. This deduction is set to expire at the end of 2025 along with other components of the TCJA. Trump’s plans regarding the deduction aren’t clear at this time. Biden would like to phase out the deduction for those with income greater than $400,000. Based on the mechanics of the deduction, an income threshold applies to many passthrough business owners already.

 

The qualified business income deduction is one of the more complicated provisions of U.S. tax law, and its various limitations make it challenging for taxpayers to predict what their deduction will be. For the most part, it does not meet the good tax policy component of certainty/simplicity. Also, it does not treat businesses in different industries equally and treats business owners differently from employees in the same line of work. For these and other reasons, the QBI deduction is neither fair nor neutral. Although Biden’s plan of phasing out the deduction for certain high earners could possibly increase fairness, doing so would add yet another component to calculating an already confusing deduction.

 

Payroll taxes

In an August 2020 Presidential Memorandum, Trump directed the U.S. Treasury to defer Social Security tax obligations of certain American workers for Sept. – Dec. 2020. If re-elected, Trump would like to eliminate these deferred taxes by providing a temporary payroll tax holiday. Biden would like to expand the Social Security tax by applying it to wages greater than $400,000. Currently this tax is capped at wages of around $137,000, meaning once a worker makes over this amount at any point in a calendar year, Social Security taxes no longer apply to further earnings for the remainder of that year.

 

Because of this wage cap, Social Security taxes are regressive. In the tax world, regressive means that the more money you make or have, the less percentage of your income or wealth is spent on the tax. To illustrate, someone who is under the Social Security wage threshold earning $30,000 per year will pay about $1,900 of Social Security tax while someone overthe Social Security wage who makes $300,000 will pay about $8,500 of Social Security tax. The first person pays a little over 6 percent of their earnings in Social Security taxes while the second person pays a little less than 3 percent of their earnings in Social Security taxes. We see a similar situation with some consumption-based taxes, such as sales taxes. Compare a low-earning family to a high-earning family of the same size and their grocery bills are likely to be about the same. However, the percentage of sales tax the low-earning family pays relative to their earnings will be higher than the high-earning family.

 

As you can see, regressive taxes such as Social Security taxes impact lower-earning taxpayers more than higher-earning taxpayers, and thus run counter to the sound tax policy principle of fairness. In theory, Trump’s payroll tax deferral was a way to temporarily make the payroll tax somewhat less regressive, as the deferral only applied to individuals earning around less than $100,000 per year. To be effective, however, the deferral would need to become permanent, which would take congressional approval. Without such an agreement, workers deferring their taxes now will pay back the deferred taxes in 2021, which not only brings back the regressive nature of the tax but puts such individuals in a tough cash flow position. Further, if this move was meant to provide greater economic momentum by putting more cash into workers’ wallets, it doesn’t address those without jobs. TheU.S. unemployment rate was around 8 percent as of Sept. 2020 as compared to 3.5 percent the same time last year. With this provision’s ultimate impact up in the air, many employers, including the U.S. House of Representatives, have so far declined to participate.

 

Biden’s proposal takes a different, more permanent, approach to making payroll taxes less regressive and more equitable. His stance improves the certainty aspect of payroll tax adjustments from a temporary deferral but could generate other issues as higher-earning workers and business owners adjust for a potentially significant hit to their earned income. In addition to the tax side of this, we must also consider how adjustments to Social Security tax withholdings impact the solvency of the Social Security system itself.

 

Corporate taxes

Currently, C corporations are taxed at a flat rate of 21 percent. Before the Tax Cuts and Jobs Act of 2017, C corporation tax rates ranged from 15 percent to 35 percent. Trump has stated that he prefers a 20 percent rate, but a formal proposal hasn’t been released. Biden would like to see the corporate tax rate at 28 percent. He has also proposed a 15 percent minimum tax on “book” income, presumably making it more difficult for large companies to report little to no income for tax purposes.

 

Biden’s proposal is primarily motivated by fairness. Many U.S. taxpayers are concerned that large corporations aren’t paying their “fair share.” While understandable, this position ignores the belief among many tax and economic policy experts that a significant portion of corporate taxes are ultimately paid by workers, shareholders, and consumers as opposed to companies themselves. For example, the Council of Economic Advisors — the agency within the executive branch that advises the president on economic policy — published a study in Oct. 2017 indicating that lower corporate tax rates would both increase real wages to workers and increase GDP, speaking to the sound tax policy components of being fair and economically efficient. Further, changes to how C corporations are taxed can impact a business’ choice of tax entity; new or existing businesses may be able to adjust their tax structure to either move to — or away from — C corporation taxing regimes, depending on which is more favorable at the time. Lastly, with countless estimates and convoluted calculations involved in many larger companies’ financial statements, an income tax imposed on a business’ book income would not be simple or neutral.

 

There you have it: the Republican and Democratic candidates’ ideas on several key tax issues. So, who makes the grade? While I’ll leave it up to you to make that call for yourself, here are some general observations:

 

  • Neither candidate has put forth a detailed, formal tax plan. As a tax professional, I would certainly appreciate that.
  • Understanding the impact of changes to tax law can be challenging and potentially impossible. As I’ve said earlier, nothing happens in a vacuum.
  • Overall, Biden’s ideas concentrate on being fair/equitable, while Trump’s plans are more focused on encouraging economic growth — hardly surprising given their party allegiances. As a tax advisor who’s helped clients navigate numerous convoluted and vague changes to tax law over the years, I would like to see tax platforms that focus on neutrality and simplicity.

 

Although tax policy won’t be the only thing on your mind as you cast your ballot, it probably will play an important role. If you have any questions about the candidates’ tax positions, please don’t hesitate to reach out.

 

 

 

Inheriting an IRA? Understand Your Options

By Hayden Adams

 

Note: Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, required minimum distributions (RMDs) for IRAs are waived for 2020. 

 

The rules surrounding inherited retirement accounts have grown more complex since the SECURE Act passed in December 2019. Here’s what we understand so far about the changes:

 

The SECURE Act doesn’t affect existing inherited accounts if the original owner died before or during 2019. Beneficiaries who inherited a retirement account before 2020 won’t have to adjust distribution plans put in place before the new rules took effect. The options for beneficiaries going forward depend on who they are and when the original account owner dies.

 

Let’s look at the options available to those who inherit a retirement account in 2020 and beyond1.

 

Options available to everyone
 

First, there are a few options available to anyone who inherits a retirement account, no matter their relationship to the original account holder.

 

Option #1: “Disclaim” the inherited retirement account

Available to: Everyone
 

How it works: By disclaiming (or not accepting) the inheritance, you allow the assets to pass to an alternate beneficiary named by the original account holder. This option can be useful for those who don’t need the assets and want to avoid the tax consequences of having additional income. By disclaiming the asset, you can potentially pass these assets on to someone in a lower tax bracket. To disclaim, you need to make this choice within nine months of the original owner’s death and before taking possession of any assets.

 

Option #2: Take a lump sum distribution

Available to: Everyone
 

How it works:  You may take all the assets in the account as a lump sum distribution without facing a 10% early withdrawal penalty. However, you’ll have to pay taxes on the withdrawal if the assets were in a tax-deferred account, such as a traditional IRA or 401(k). Using this option could place you in a higher tax bracket. Importantly, you’ll also lose out on the potential benefits of any additional tax-deferred appreciation.

 

Options available to “eligible” designated beneficiaries
 

Under the SECURE Act, “eligible” designated beneficiaries are largely able to use the old rules for distributions from an inherited retirement account.

 

Eligible designated beneficiaries include the following 5 types of people:

  1. Surviving spouses 
  2. Minor children of the deceased2
  3. Disabled individuals3
  4. Chronically ill individuals4
  5. Individuals not more than 10 years younger than the deceased (for instance, a sibling)

 

Option #3: Transfer the funds into your own IRA

Available to: Surviving spouses 
 

How it works: The rules about subsequent withdrawals are the same as if the account had always belonged to you. For example, if you want to withdraw funds after the transfer but are not 59½ yet, you must pay a 10% early withdrawal penalty. And assuming the money was tax-deferred, you must also pay the taxes owed on the distribution—the same as with any traditional IRA.

 

Option #4: Take distributions over your life expectancy

 

Available to: All eligible designated beneficiaries (there is a limit to this rule for minor children)
How it works: Assuming you don’t need all the money at once, you could transfer the funds into an Inherited IRA held in your name, sometimes referred to as a “stretch” IRA. This option enables you to take required minimum distributions (RMDs) based on your life expectancy, allowing the bulk of the money more time to potentially grow tax-deferred.

 

Although your life expectancy may be used to calculate the amount of your RMDs, the initial timing of those RMDs is determined by the age of the deceased account holder and your relationship to them. Having professional guidance here can really pay off given that an RMD miscalculation could result in a 50% penalty for any undistributed amount.

 

  • If the original account holder was over the RMD age at the date of death: You must begin taking distributions no later than December 31 of the year following the original account holder’s death. The RMDs from the account can be spread out over your life expectancy or the remaining life expectancy of the original account holder, whichever is longer. If the original account holder didn’t take an RMD for the year he or she died, you need to take that distribution as well—or pay a 50% penalty.

 

  • If the original account holder was under the RMD age at the date of death: You must also begin taking distributions no later than December 31 of the year following the original account holder’s death. However, if you’re the spouse of the deceased, you’ll be able to wait to take RMDs until December 31 of the year in which the decedent would have had to take those RMDs.

 

  • Minor children: Minors of the deceased are allowed to stretch out the distributions over their life expectancy¬–but only until they reach the age of majority, which is determined by their state of residency. Once they reach the age of majority, they switch to the new 10-year distribution rule (see below to learn more about the 10 year rule).

 

 

Options available to designated beneficiaries who are not “eligible”
 

In general, if you’re not one of the 5 “eligible” beneficiaries listed above, you’re no longer able to stretch out the distributions from an inherited retirement account over your life expectancy. Now, you’re required to distribute all the assets from the account with 10 years of the original account holder’s death.

 

Option #5: Distribute the assets within 10 years

Available to: Those who are not “eligible” designated beneficiaries
 

How it works: While there is no annual RMD, you must distribute the assets within 10 years. For example, you can take some assets out each year or just leave all the assets in the account until the last day. However, any assets that are not distributed by the end of the 10th year, will be subject to a 50% penalty.

 

Whether you leaving the money in the account for the 10-year period or take out a portion of the money each year depends on several factors, including the type of account. If you inherit a Roth account, it could make sense to leave those assets in the account for as long as possible. This way the funds can potentially grow tax free for the entire period– then before the end of the 10th year those assets can be taken out tax free.

 

If you inherited a relatively large tax-deferred account (like a traditional IRA) it could make more sense to take distributions from the account each year. This way you avoid taking a single large distribution in the last year, which could push you into a much higher tax bracket.

 

What about those who are not listed as a designated beneficiary?
 

Some people end up inheriting a retirement account through an estate. In these situations, the distribution method used will generally follow the old rules from before the SECURE Act. In general one of the following methods must be used to distribute the assets…

 

  • Disclaim the inherited retirement account
  • Take a lump sum distribution
  • Distribute the assets within 5 years (there is no annual RMD requirement). This method is used when the original account owner died before their RMD age.
  • Take RMDs based on the original account owner’s life expectancy. This method is used when the original account owner died after their RMD age.

 

Role of an estate or financial planner
 

Given the complexity of the new rules, it’s a good idea to meet with an estate or financial planning professional to make sure your accounts are set up to carry out your wishes. Similarly, if you inherit a retirement account consider meeting with a professional to ensure that you understand the rules and can implement a tax-efficient withdrawal strategy. 

1 The options discussed in this article are strictly for individuals. Please consult with a financial consultant for rules governing trusts accounts.
2Once the age of majority is reached, the rules change. This rule does not apply to grandchildren, only the direct descendant of the parent.
3At the date of death the individual must be disabled, as defined by IRC 72(m)(7)
4At the date of death the individual must be chronically ill, as defined by IRC 7702B(c)(2)

 

 

 

Three steps for improving client cash flow

By Jeff McKenzie

 

Accountants are often highly trusted advisors for small and midsized businesses. They turn to you in times of uncertainty and when their businesses face new challenges. This has never been more present than in today’s business climate; and when it comes to cash flow, the solutions have never been more critical. We know the importance of strong cash flow for these organizations. It often means, literally, keeping the lights on. Providing your clients with tangible actions they can take to improve cash flow may be one of the most important and impactful pieces of advice you can give.

 

In simple terms, improving cash flow or, said a different way, getting paid faster, comes down to a few targeted actions: send invoices quicker, offer digital options and only manage exceptions. Let’s break down each of these in order.

 

Send invoices quicker

 

Many SMBs wait too long to send invoices due to either process or operational capacity issues surrounding the invoice workflow. The activities required to generate, prepare, process and send invoices take significant effort and the people responsible have many other high-value tasks to get done each day. This often results in delays in sending invoices either weekly or sometimes monthly. Additionally, when manual processes exist, errors can occur, which create additional delays in the invoice delivery cycle.

 

Late communication with customers results in two different outcomes: a bad customer experience and a late payment. Old invoices are like fish sitting on the kitchen counter — the longer they are out, the smellier they get — and the less likely they are to be paid. Sending the invoice is the starting point for getting paid faster, and sending invoices faster has an immediate impact on cash flow.

 

Digital options and frictionless AR

 

If there is one area where many SMBs are behind, it is the transition to digital. That means sending invoices that allow customers to pay online through a channel most convenient to them. If your clients are still sending physical invoices or sending invoices via email but only offering pay-by-phone or pay-by-check, the cash flow bottleneck is obvious.

 

The business-to-business environment has evolved past physical processes. Accounts payable professionals expect a much more consumer-like approach to invoice payment than they have in the past. Access and convenience are key to improving the payment cycle. Online, self-service options make it more convenient and provide better access to the information needed to pay faster.

 

Only manage exceptions

 

Where we see the most time wasted across all business sectors is the way in which the account aging process is managed. The most common process looks something like this: Download the aging report to a spreadsheet software app, sort by highest balance or oldest balance, divide the list of accounts among collectors, and start making calls and sending reminders. Each week a new list is generated and the process repeats itself. This ends up being one of the most inefficient processes related to the entire cash collections process and has the most significant impact on cash flow.

 

The trick is to identify the customers that are most likely not to pay, so as not to spend more time than is necessary on customers that are likely to pay without intervention from the collections team. Efficiency skyrockets and cash flow improves.

 

Process improvement

 

While these three targeted actions may seem logical or even obvious to you, it may not follow that your clients will carry them out in the most optimal way. Every business process can be improved, and optimizing the invoice-to-cash process requires the implementation of targeted technology. While enterprise resource planning systems add significant automation to the overall business, targeted software enhances and optimizes specific business-critical processes. To better understand this, the invoice-to-cash cycle can be considered in two steps: invoicing and cash collections.

 

The invoice process starts with generating an invoice file from the accounting platform or ERP system. From there, a series of business rules must be applied. These business rules can vary significantly from business to business, often based on traditional, legacy practices. Examples of business rules include identifying VIP customers for special handling, removing zero-balance or low-balance invoices, pulling past due invoices, consolidating multiple invoices going to the same customer, emailing customers based on their contact preference request, and the list goes on. In my career I have seen more than 100 variations of customer-specific business rules — and no two businesses are the same.

 

All your SMB clients want to get paid faster, and that boils down to sending invoices quicker and offering digital options. Help them to understand the challenges and how they can be overcome. Modern output management and AR software strategies help SMBs manage business rules, automate processes, and identify customers who may need additional attention to get invoices paid.

 

 

 

Remote workers may provide tax savings for employers

By Roger Russell

 

Working remotely during the pandemic may become routine, as both companies and workers come to appreciate the convenience and savings available. Companies in major cities are making plans to downsize their workspace, while many employees find they prefer the convenience of working from home. Some of the risks involved, such as surprise nexus issues, are obvious — employees that reside in a different state than their business can subject their employer to tax in the state where they perform their work.

 

But there are also opportunities to save on taxes imposed by local jurisdictions on the business entity, according to Nishant Mittal, senior vice president of Topia, which specializes in helping companies manage employees in a “distributed workforce.”

 

A number of local jurisdictions — and the list is growing — impose local taxes on business entities, he indicated. “In some cases, such as New York City, the tax applies to unincorporated businesses. This would include partnerships, LLCs and sole proprietorships,” he said. “It would apply to a myriad of accounting firms, hedge funds and law firms that are not structured as corporations.”

 

With an unincorporated business tax rate of 4 percent, the amount of the tax is significant. The tax rate “is charged to income allocated to New York City,” meaning that income is not allocated to a business for employees working from a location outside of New York City.

 

“You can take away that portion of the work that is not performed in New York City and you don’t have to pay the 4 percent,” said Mittal. “It can be quite a substantial savings for businesses that make a lot of money. Large companies can save millions in taxes.”

 

Other jurisdictions such as the District of Columbia, Philadelphia, San Francisco and Seattle all impose these types of taxes. “This is an ongoing conversation,” he said. “Other jurisdictions are considering this, since they are under increasing pressure to find alternative means of raising revenue. And states will be increasingly unable or unwilling to come to their aid,” he predicted.

 

“San Francisco has three different taxes that come together — a gross receipts tax, a homelessness tax, and a payroll expense tax. These are applied to incorporated businesses as well as unincorporated businesses,” Mittal said. “The tax rate depends on the industry category of the business.”
 

As an example of the magnitude of the savings possible, Mittal posited a large technology corporation with $3 billion in revenue that has 5,000 employees worldwide. “About 1,000 of them work from the San Francisco office,” he said. “If half of them work remotely, they can save $2.5 to $5 million in tax. These are meaningful savings, if the company realizes it.”

 

“Companies need to take advantage of this if they otherwise qualify,” he said. “But we advise companies thinking about this opportunity that all tax jurisdictions are going to be aggressive. States, counties and cities all have significant deficits, so states are unlikely to assist the local jurisdictions since they have their own issues.”

 

“Since local budgets won’t get fixed anytime soon, expect to be audited,” Mittal said. “To successfully fight the audit, a business should be prepared to prove who is working, from where and for how long. The burden of proof falls on the taxpayer, so if the local jurisdiction audits the taxpayer, the onus will be on the firm to provide clear and convincing evidence about the position it has taken. But given the amount of tax savings involved, the effort is worth it.”

 

 

 

SBA and Treasury simplify forgiveness of PPP loans under $50K+

By Michael Cohn

  •  

The U.S. Small Business Administration and the Treasury Department are making it easier for companies to get their Paycheck Protection Program loans of $50,000 or less forgiven with a simpler loan forgiveness application and interim final rule.

 

The new application form and rule were unveiled Thursday night, along with instructions for completing the form.

 

The PPP was part of the CARES Act passed by Congress in March to provide relief to struggling small businesses coping with the impact of the novel coronavirus and the economic downturn precipitated by the pandemic. It offered SBA-backed loans that could be forgiven as long as the business met conditions such as retaining employees for eight weeks. However, many businesses have been confused about the ever-changing rules for the hastily rolled out program and for getting their loans forgiven. Until a week ago, no loan forgiveness applications were being approved by the SBA. The SBA and the Treasury hope the new application will make the process a little less difficult for business owners, at least for the many who took out loans of $50,000 or less.

 

Under the new rule, PPP borrowers of $50,000 or less won’t have the amount of their loan forgiveness reduced based on reductions in full-time-equivalent employees or reductions in employee salary or wages. The newly simplified forgiveness application, Form 3508S, can be used by borrowers with a total loan amount of $50,000 or less, unless they and their affiliates received loans totaling $2 million or more.

 

“The PPP has provided 5.2 million loans worth $525 billion to American small businesses, providing critical economic relief and supporting more than 51 million jobs,” said Treasury Secretary Steven T. Mnuchin in a statement Thursday. “Today’s action streamlines the forgiveness process for PPP borrowers with loans of $50,000 or less and thousands of PPP lenders who worked around the clock to process loans quickly,” he continued. “We are committed to making the PPP forgiveness process as simple as possible while also protecting against fraud and misuse of funds. We continue to favor additional legislation to further simplify the forgiveness process.”

 

The SBA started approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers on Oct. 2. The SBA said it plans to continue to process all PPP

forgiveness applications in an “expeditious manner.”

 

“Nothing will stop the Trump Administration from supporting great American businesses and our great American workers,” said SBA administrator Jovita Carranza in a statement Thursday. “The Paycheck Protection Program has been an overwhelming success and served as a historic lifeline to America’s hurting small businesses and tens of millions of workers. The new form introduced today demonstrates our relentless commitment to using every tool in our toolbelt to help small businesses and the banks that have participated in this program. We are continuing to ensure that small businesses are supported as they recover.”

 

Many accountants have been helping their small business clients apply for PPP loans and fill out the loan forgiveness applications. Heather Bain, chair of the Small Business Committee of the Institute of Management Accountants and owner of Bain CPA Business Strategies in Houston, believes the new rule issued by the SBA on Thursday doesn’t go far enough, though, in simplifying the process.

 

“There weren’t really that many changes,” she said. “In fact the whole rule only reduced the complexities for calculating full-time equivalents and the reduction in wages. That’s it. The rule even says that doesn’t really apply to the majority of those loans that were under $50,000. That’s why they’re allowed under the de minimis rule in the first place. I don’t think we’re going to see that many businesses benefit from that rule. And what most of my clients and companies that I work with have said is that they were hoping for an automatic forgiveness where you don’t have to wait to find out for sure if you are going to get forgiveness, and that was not part of the interim final rule.”

 

The new rule may well disappoint many small business clients. “They were hoping for a certain loan amount and the forgiveness would just be automatic,” said Bain. “There wouldn’t be a lender decision and an SBA decision. It would just be if you signed your affidavit and completed it and turned it in, you would have automatic forgiveness. But that apparently is not part of any of the discussion with the new interim final rule.”

 

The changes are estimated to cover approximately 9 million forgiveness applications. “It was a fairly small statistic because many of the loans that are $50,000 or less were partnerships or self-employed or they didn’t have employees or had so few employees that they didn’t have the full-time equivalent [employee] reduction,” said Bain. “They didn’t have the calculation for reduction of wages or any of that. It only applies to those two issues. It doesn’t guarantee forgiveness. It still requires that the borrower provide additional information to the lender, certify how it’s reviewed, and calculate the payroll and non-payroll costs and all of those. All of the other rules still apply.”

 

The PPP loan application deadline ended on Aug. 8 with over $130 billion left unspent from the funds allocated to the program. House Speaker Nancy Pelosi, D-California, is continuing to negotiate with Mnuchin about reviving the program as part of a larger stimulus package, but Democrats and Republicans remain at odds over the size of the package and whether it should be piecemeal or be an all-encompassing package with relief for airlines, state and local governments, and offer another round of stimulus payments for individuals. However, demand for PPP loans from small businesses appeared to be flagging well before the deadline expired.

 

“They’re not really interested,” said Bain. “Most of the companies that I work with have mentioned that they’ve already taken the loan if they’re going to take the loan. That’s why there are funds left over. Because there is some exclusivity between being allowed to take certain payroll tax credits and applying for the loan, if they’ve already taken the credits, then they wouldn’t be eligible for the loan. So they’re not going to apply for the loan.”

 

To help small businesses cope with the recession, she recommends that accountants provide cash flow projections for them. “There are several procedures that companies go through when they’re in receivership,” said Bain. “One of them is the 13-week cash flow and those sorts of reports. That’s what I would recommend businesses look at is analyzing the business as if it were under receivership, and paying close attention to the cash flow and the forecasting from now until the end of 2020 so that they can make very high-quality decisions about how to spend their funds. And talk to a tax accountant about the tax deferrals and the estimated tax payments because the rule is either 100 percent of the tax from last year, which is probably an overestimate for most businesses this year, or 90 percent of this year. So if they’re making a 90 percent deposit for this year, many of the businesses will be OK as long as they do their very best at projecting their income. Especially for the companies that only have a $50,000 or less loan, if those expenses are not ever deemed to be deductible, then they still may have a little bit of wiggle room, depending on how much their revenue actually is.”

 

Businesses may also be able to take advantage of the net operating loss tax breaks in the CARES Act, which allow losses to be carried back five years.

 

“That is one of the big changes,” said Bain. “Now they can go back farther than before and so there will be a lot more amended returns once the losses are calculated for 2020 and even into 2021. There are many forecasts saying the market won’t recover until 2022, so 2021 will possibly be a net operating loss for many companies as well. That’s why cash flow management is so important because they may have paper losses because of depreciation and other deductions that are not cash deductions. That may help them significantly with their cash flow.”

 

The National Association for the Self-Employed welcomed the new SBA loan forgiveness changes. “The announcement by the Administration of a simplified process of loan forgiveness for small businesses who accessed $50,000 and less in PPP loans is an incredibly welcome sign,” said NASE president and CEO Keith Hall in a statement Friday. “We are thrilled about this new SBA and Treasury interim guidance to help small businesses during a time many of them are looking at the last quarter of estimated tax payments and year-end accounting. This newly announced guidance is a welcome step, but it can’t be the last step this year to help the American small business community who are desperate for critical relief now. Therefore, it’s imperative the Administration and Congress come back to the negotiating table and work together to provide the immediate financial relief for the American people and our nation’s small business community.”

 

 

 

 

Top 10 year-end tax planning tips

 

Between the upcoming presidential election and the COVID-19 pandemic and its attendant stimulus packages, this year has seen more than its share of uncertainty around tax — which makes helping clients with year-end planning all the more crucial.

 

“Year-end tax planning is more important than ever this year,” said Renato Zanichelli, national managing partner of tax services at Grant Thornton, in a statement. “Businesses both large and small have been dealt a tough hand. Having the right tax strategy will help businesses navigate this time of historic disruption and put them on the right track as a new year begins.”

 

“Lawmakers dedicated trillions of dollars to keep families and businesses afloat, but those provisions may also require quick action, in many cases by the end of this year,” added Dustin Stamper, managing director in the firm’s Washington National Tax Office. “The government wants to get money in the hands of those who need it, and many of the most generous provisions are tax changes that provide welcome liquidity for businesses and timely relief for individuals.”

 

With that in mind, the Top Eight Firm has put together a list of 10 key tax considerations for year-end planning for both individuals and businesses (below); for more see their year-end tax planning guides.

 

Everyone is entitled to a charitable deduction this year. The Tax Cuts and Jobs Act doubled the standard deduction while repealing or limiting many itemized deductions, leaving millions fewer taxpayers claiming actual itemized deductions. Typically, there is no tax benefit for giving to charity unless you itemize deductions. However, the CARES Act created an above-the-line deduction of up to $300 for cash contributions from taxpayers who don’t itemize. To take advantage of this provision, taxpayers should make sure to donate before the end of the year.

 

2. Understand the impact of that stimulus check

The CARES Act directed the IRS to issue stimulus checks of up to $1,200 per taxpayer and $500 per qualified child dependent earlier this year. The payments were paid based on 2018 or 2019 return information, but are actually structured as advances of 2020 tax credits. The credits phase out for higher-income taxpayers, so taxpayers want to understand the implications if the check they received based on 2018 or 2019 won’t match the amount of credit they will calculate on the 2020 return. If the 2020 credit calculation is less than they received, there is no clawback. If they received less than the credit calculated for 2020, they can claim it as an additional refund.

 

3. Supercharge investment with opportunity zones

Opportunity zones are one of the most powerful incentives ever offered by Congress for investing in specific geographic areas. In certain scenarios, not only can an investor potentially defer paying tax on gains invested in an opportunity zone until as late as 2026, but they only recognize 90 percent of the gain if they hold the investment for five years. Additionally, if they hold the investment for 10 years and satisfy the rules, they pay no tax on the appreciation of the opportunity zone investment itself. If they’re worried about capital gains rates going up under a new administration, this may provide an excellent tax-free investment. There are more than 8,000 opportunity zones throughout the United States, and many types of investment, development and business activities can qualify.

 

4. Make up a tax shortfall with increased withholding

COVID-19 created cash-flow problems for many individuals. Taxpayers should make sure their withholding and estimated taxes align with what they actually expect to pay while they have time to fix a problem. If they find themselves in danger of being penalized for underpaying taxes, they can make up the shortfall through increased withholding on their salary or bonuses. A larger estimated tax payment at the end of the year can still expose them to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save them in penalties.

 

5. Leverage low interest rates and generous exemptions before they’re gone

The historically low interest rates and lifetime gift and estate tax exemptions present a powerful estate-planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. In addition, the economic fallout of COVID-19 is depressing many asset values. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. The current gift and estate tax exemptions are set to expire in a few years, and a new administration in the White House could accelerate that timeline.

 

FOR BUSINESSES: 6. Accelerate AMT refunds

When the Tax Cuts and Jobs Act repealed the corporate Alternative Minimum Tax, it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020 and 2021. The CARES Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. This gives companies several different options to file for quick refunds. The fastest method for many companies will be filing a tentative refund claim on Form 1139, but corporations must file by Dec. 31, 2020, to claim an AMT credit this way.

 

7. Use current losses for quick refunds

The CARES Act resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years for refunds against prior taxes. These losses can even offset income at the higher tax rates in place before 2018. Companies should consider opportunities to accelerate deductions into a loss year to benefit from this rate arbitrage and obtain a larger refund.


Accounting method changes are among the most powerful ways to accelerate deductions, but remember any non-automatic changes a company wants to make effective for the 2020 calendar year must be made by the end of the year. C corporations make NOL refund claims themselves, but passthrough businesses like partnerships and S corporations pass losses onto to owners, who will make claims.


The fastest way to obtain a refund is generally by filing a tentative refund claim, but these must be filed by Dec. 31, 2020, for the 2019 calendar year. If losses will be in 2020, the business should start preparing to file early, because they cannot claim an NOL carryback refund until they file their tax return for the year.

 

8. Retroactive refund for bonus depreciation

The CARES Act fixed a technical problem with bonus depreciation, a generous provision that allows companies to immediately deduct the full cost of many types of business investments. The legislation expands bonus depreciation to apply to a generous category of qualified improvement property. QIP is commonly thought of as a retail and restaurant issue, but it is much broader and applies to almost any improvement to the interior of a building that is either owned or leased. The fix is retroactive, so businesses can fully deduct qualified improvements dating back to Jan. 1, 2018, which may offer relatively quick refunds. Taxpayers who filed 2018 and 2019 returns before the law changed can choose whether to reflect the additional retroactive deduction entirely in the 2020 year with an accounting method change, or amend both the 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.

 

9. Claim quick disaster loss refunds

Tax rules allow businesses to claim certain losses attributable to a disaster on a prior-year tax return. This is meant to provide quicker refunds. President Donald Trump’s COVID-19 disaster declaration was unprecedented in scope, designating all 50 states, the District of Columbia and five territories as disaster areas. This means essentially every U.S. business is in the covered disaster area and may be eligible for refunds from certain types of losses. Under this provision, a business could claim a COVID-19 related disaster loss occurring in 2020 on a 2019 amended return for a quicker refund. The provision may potentially affect losses arising in a variety of circumstances, including the loss of inventory or supplies or the closure of offices, stores or plants. To qualify, the loss must actually be attributable to or caused by COVID-19 and satisfy several other requirements.

 

10. Consider the timing of payroll tax deduction

The CARES Act allows employers to defer paying their 6.2 percent share of Social Security taxes for the rest of 2020. Half of the deferred amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022. This provides a great liquidity benefit, but taxpayers should consider the impact on deductions before the end of the year. Businesses generally cannot deduct their share of payroll taxes until paid. For most businesses, the value of deferring the actual payment is worth also deferring the deduction, but there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the rate arbitrage benefits discussed above. Some taxpayers using specific methods of accounting may also be able to pay the taxes as late as 8-½ months into 2021 and still claim the deduction for 2020.

 

BONUS: Re-evaluate the company’s tax function

Many tax departments at even the largest and most sophisticated companies still dedicate most of their time to basic number-crunching and repetitive processes. These kinds of inefficiencies make it hard to meet deadlines, present audit and tax risks, and cost businesses money — especially during unprecedented times like the COVID-19 pandemic where teams may be lean and struggling to keep up. Data analytics and automation can help mitigate these problems and enable a business’ tax function to focus more on strategic, value-added solutions — shifting away from a compliance-only role.

 

The election, COVID, and markets

Hopes for more stimulus may be sustaining markets through political tumult.

FIDELITY VIEWPOINTS

 

Key takeaways

  • The prospect that the Democrats might win the White House as well as the Senate was likely already priced into the market before the news broke about the president's COVID diagnosis.
  • For now, the market remains laser-focused on whether there will be another tranche of fiscal relief. With the liquidity impulse waning, this is a needed bridge toward economic recovery. The dramatic back-and-forth over the past few days shows how high the stakes are for the market for another fiscal bill to be passed before the election.
  • The prospect of a "blue wave" leading to an even more expansionary fiscal policy could be offsetting market concerns about potentially higher taxes and increased regulation.
  • It's possible that ongoing expansion in fiscal policy (and therefore, further debt and deficits), could be bankrolled by the Fed through continued asset purchases and very low rates.
  • That policy combination could follow the World War II playbook, during which the central bank kept interest rates well below the inflation rate while increasing its balance sheet 10-fold in order to absorb the increase in Treasury supply.

 

Can 2020 get any more 2020? Every time I think this bizarre year can't get any stranger, it gets even more surreal and at a speed that is hard to keep up with. The market is understandably in a state of unease as we await news on the president's health and how this might affect the upcoming election. But with only a month left before the election, the market is laser focused on fiscal policy right now, and there appears to be some positive momentum on that front.

 

The chart below shows that the odds of the president's re-election were already low and falling following last Tuesday's debate, as were the odds of the Republicans keeping control of the Senate. In other words, a Biden win and a blue wave, with all the potential policy implications that this implies, were likely priced in already before Friday's news.

 

The data in the chart is described in the text.

Daily data as of 10/04/2020. Source: FMRCo, Predictit

 

Elections and your money

 

Learn how different 2020 election outcomes could impact your finances.

 

But we all know how wrong the polls were in 2016, and this being 2020, we should be prepared for any outcome. Perhaps the market will just float in a state of suspended animation until election day, but on the surface, it seems to be taking the odds of an election upset, a potential Democratic sweep, in stride.

 

As the chart shows below, while historically a blue sweep has produced below-average results for the stock market over the subsequent 2 years (presumably because of increased regulation and higher taxes), I wonder if that will hold true this time around. Perhaps today's focus on massive fiscal policy stimulus (20% of GDP this year alone) "enabled" by the Fed's ultra-accommodative monetary policy is overriding those concerns.

The data in the chart is described in the text.

 

This chart shows the average returns for all 2-year and 4-year periods following each of the scenarios presented. The bar values represent average returns and that there is significant variation in the returns. Monthly data as of 10/04/2020 since 1789 (mix of S&P 500, DJIA, and Cowles Commission). Source: FMRCo.

 

The current wave of COVID-related fiscal and monetary liquidity can be seen below. The chart below shows the spike in excess liquidity (M2 growth − GDP growth). (M2 is a measure of the money supply and it includes cash, checking and savings account deposits, and money market securities.) That is a massive liquidity impulse. No wonder the market's valuation is through the roof.

 

The bars in the bottom panel show the year-over-year growth in excess liquidity and the line shows the annualized quarter-over-quarter series. This chart shows that the liquidity impulse is waning fast. That means that unless another phase of the CARES Act comes soon, the market's former valuation tailwind could turn into a headwind. This is why the market is on pins and needles waiting for the next phase of fiscal relief.

 

The data in the chart is described in the text.

Weekly data as of 10/04/2020. Source: FMRCo, Bloomberg.

 

So what will happen in a blue wave, if that is what's coming? Will an increase in taxes and regulations be offset by an ongoing expansion in fiscal policy (and therefore, further debt and deficits), "funded" by a Fed that keeps policy rates below the inflation rate while simultaneously offsetting the increase in Treasury supply with additional bond purchases?

 

As outlandish as this may sound (or would have sounded a few years ago), this is exactly what the Fed did during the 1940s when the US entered World War II and ran up a massive debt in the process.

 

Following the Great Depression of the 1930s, in 1942 the US government went into high gear to enter World War II (following the attack on Pearl Harbor), and in the process ran up a tremendous amount of government debt. Federal debt as a percent of GDP increased from 39% to 116% during the first half of the 1940s.

 

Not only did the Fed monetize this debt by increasing its balance sheet 10-fold, but it also repressed the entire yield curve by capping short rates at 3/8% and long rates at around 2.5%. During this period, inflation ran up, but with the Fed repressing rates at very low levels, real rates were on a steady march to increasingly negative levels. That is one way to get out of debt.

 

 

 

Paying for the pandemic: Are increased taxes the answer?

By Rob Mander

 

The pandemic has seen governments around the world take action to support businesses of all sizes and protect their economies. This is one of the core roles of any government, supporting citizens in times of critical need, and the pandemic required a quick and far reaching response. However, this support needs to be paid for, and while no one is questioning the necessity of government action, conversations have already started about how the increased expenditure will be funded. This will focus on two major questions: What is the role of corporate tax, and how do we tax the digital economy?

 

What is the role of corporate tax?

The overall direction of the tax debate seems to be for an increase in corporation tax as a percentage of total tax revenues. This makes sense but bucks the historical trends that we have seen over recent decades. For the period 2000-2020, a total of 88 countries lowered their corporate tax rate, 15 remained the same, and only 6 raised their base rate. Looking at the OECD’s 2020 data, of the 109 countries examined, only 21 had a rate higher than 30 percent, and only India had a rate higher than 40 percent. At the opposite end of the scale, 14 countries had a rate below 10 percent, 28 had rates between 10 and 20 percent, and the remaining 48 fell between 20 and 30 percent. Overall, the trend points toward the mid-range of between 10 and 30 percent, but a significant drop in the mean from 28 to 20.7 percent.

 

What this data shows is that an increasing number of governments were not equating higher rates of tax with higher rates of revenue. Ireland is the perfect example of a country that lowered its corporate tax rate, while restructuring its broader tax mix to account for the value that multinational corporations could bring to their economy. Low tax rates, combined with additional incentives targeted at intellectual property and research and development, meant that multinationals were willing to headquarter themselves there for tax purposes and pass on the economic benefits of their presence to the economy. Looking at their economic growth over the last decade, it is a move that certainly paid off.

 

The issue is that governments have long viewed corporate taxes as “safe income,” as it is relatively easy to forecast and grows in line with the economy. But with taxable profits slumping the world over, as a result of lockdowns, many governments are looking to increase corporate tax rates to help make up the shortfall. It is tempting to raise taxes, and think that as the global economy recovers the job is done, but that ignores a huge opportunity that governments now have: to structurally reform corporate tax.

 

Corporate tax can and should be viewed as a way to shape businesses decisions. The countries that do this best will look at how their tax policies can be used as a “carrot” to encourage the business investment and activities they want to see. There is already a precedent for this and again looking at this year’s OECD data, we can see that 57 of the 74 countries tracked were willing to offer tax breaks if they led to long-term value. What this means is that incentives such as R&D tax credits have been recognized as a price worth paying for longer-term economic growth.

 

Yes, the investment by governments worldwide to bolster their economies needs to be accounted for, but they can be paid for in economic growth generated by a rejuvenated private sector. Governments can play an active role in the stewardship of this investment if they can resist the urge to provide simple solutions to complex problems. Forgoing tax rises may be viewed as a gamble, giving up income now for longer-term rewards, but in reality, it is about creating a global tax system that supports economic growth and reflects the reality of what citizens expect their governments to be able to deliver.

 

How do we tax the digital economy?

 

Another major challenge facing governments that are looking to change their tax structures is finding a meaningful way to tax global, digital companies. This requires governments — nationally focused entities — to think globally.

 

Digital services taxes have been viewed as something of a silver bullet for tax policy setters, a way of accessing a portion of income that had previously evaded traditional tax measures, a way of taxing the businesses that have thrived through lockdown thanks to our increasing reliance on tech to keep us connected and up to date. However, that thinking misses two more important points. Firstly, intangible assets are increasingly valuable to the economic recovery, and secondly, it is not a zero-sum game, an increase in global tax paid in one country will mean a reduction in tax paid in another.

 

While some countries have already introduced digital services taxes, and others are planning to do so, the OECD’s efforts to find a global solution has been delayed once again. It is right that governments want to restructure their taxes to reflect a shift in where value is created, but introducing a flat tax on local revenues has already seen costs passed on to consumers, a prime example being Amazon charging sellers an additional 2 percent to use the platform, and has ignited trade friction between the U.S. and Europe. A more effective long-term solution is for governments to continue to work together to create a new system of taxation that aligns with the global digital age we live in.

 

A way forward

 

Following the global recession in 2008, the recovery relied heavily on taxation increases and spending cuts. However, the government response to the pandemic has required much higher levels of spending that will require far greater changes to the tax system than the increases we saw in 2009. Governments must also resist the urge to simply raise rates and assume revenues and economic recovery will come.

 

The pandemic has demonstrated the crucial role that tax plays in our society. Without an effective tax system, governments cannot fund health care or support society generally through the host of measures we have seen, from furlough schemes to business loans. When there is a sudden shock, taxes allow governments to respond in the best interests of society.

 

Global solutions are needed, especially when we start to ask questions about how to tax companies that operate on a global scale. In many ways, it is a foreign concept for national tax legislators to start thinking globally, but it will be necessary. It is also crucial that any tax changes recognize the global nature of their own economies.

 

The pandemic has been a time of global hardship, but we can use this moment to recognize what we value and reshape our tax systems to better reflect and support the societies we want to live in.

 

 

 

A short guide to IRS transcripts

By Jason Schow

 

An IRS transcript is an administrative record of the actions that have taken place in an individual’s tax history. While they are notorious for being complex, they can be incredibly helpful in the hands of tax professionals who know how to use them. But it’s important to understand and use transcripts to their fullest potential.

 

Types of transcripts

There are five kinds of transcripts, so you need to know which one will provide you with the information you need. You should note that unlike tax returns, they are all free. Also, you will have to use Form 8821 and 2848 to gain authorization to access your clients’ transcripts. I have listed each transcript type with a short description.

 

Tax account transcript: This type of transcript shows a year-by-year history of a taxpayer’s account that includes basic information but also more detailed data. For example, you can find the person’s marital status and adjustments made by the taxpayer after they have filed a return, including filings, extensions, withholding, credits, penalties and assessments. If requested online or with Form 4506-T, you’ll have access to up to 10 prior years of information. If requested by mail or phone, access will be limited to three years.

 

Wage and income transcript: This document discloses a taxpayer’s income as reported to the IRS. These transcripts are helpful for looking up federal records, but they do not include state income tax withholding. It is available for the prior 10 years if requested online or with Form 4506-T, and the current year’s information may not be available until July.

 

A wage and income transcript assembles all information concerning W-2s, 1099s, 1098s, K-1s and 5498s. It can be helpful for verifying employment or filing an extended tax return. These transcripts can be longer than 100 pages, but it is possible to request a one-page summary version.

 

Tax return transcript: This shows most of the line items from a taxpayer’s tax returns, including the 1040s as they were originally filed, but it doesn’t provide any changes made after the filling. This type of transcript may be useful for mortgages, financial aid and student loan lenders. You can request a tax return transcript for the current tax year and the previous three years.

 

If your client's spouse on a joint return is requesting this transcript, they must ask for it online or use Form 4506-T. However, the primary taxpayer on the joint return must make the request by phone or mail.

 

Record of account transcript: A record of account transcript is a mix of tax account transcripts and tax return transcripts. It is available for the current tax year and the prior three years. You can request this document online or by using Form 4506-T.

 

Verification of non-filing letter: This document provides proof that the IRS has no record of a filed return for the requested year but does not indicate whether or not a return should have been filed. This letter is automatically generated if the return has not yet been processed.

 

This transcript can be requested for the current tax year and up to the 10 previous years using Form 4506-T, but if the demand is made by mail or phone, only up to three previous years can be provided. The current tax year is available after June 15.

 

Principal reasons to use a transcript

IRS transcripts contain so much data that they can be useful for a lot of situations. We have listed the most common cases where you would probably need to request one or many transcripts.

 

Access your client’s tax history: Transcripts will help you understand in detail a client’s standing with the IRS. For example, you’ll be able to see penalties, interest owed on tax liabilities, past return history, and if and when an audit happened. A tax account transcript can be very useful to familiarize yourself with a new client.

 

Find lost or misplaced records: If a client cannot find a personal record — such as W-2s or 1099s — you can request their wage and income transcript. This would include a copy of every W-2 and 1099 for each tax year.

 

Check for returns to be amended or reconstructed: Transcripts can also help you identify whether a client’s past tax return should be amended and make it easier to do so. The client’s transcripts will provide details about previous tax returns, which can be helpful if you are missing physical copies.

 

Typically, a return transcript will help you determine which returns have to be amended and you will need a wage and income transcript to make those changes. You might also consider getting a tax account transcript for this purpose. It’s also possible to reconstruct a tax return that has been lost with the required information from a transcript.

 

Determine if first-time penalty abatement applies: The most recent years’ account transcripts will allow you to identify whether or not a client qualifies for first-time penalty abatement.

To qualify, the below requirements must be met by your client:

  • Has filed all required returns;
  • Has paid, or has arranged to pay, any due tax; and,
  • Does not have any penalties for the three tax years prior to the tax year in which the penalty was received

 

For more detailed information about penalty abatements, you can consult this ebook.

 

Help protect your client from tax fraud: Unfortunately, today identity theft through the filing of fraudulent tax returns is rising exponentially.

 

Taxpayers who fall victim to tax fraud have long delays in getting the refund due them. The average identity theft case takes 180 days to resolve, and some situations can take up to a year.

You can help reduce tax return fraud for your clients by becoming more familiar with their transcripts. If a tax return has been filed with your client’s personal information, it will show up on their account as a line item, and if you are aware that your client hasn’t filed a return at that time, they may be a victim of tax fraud.

 

You should alert both your client and the IRS if you spot a suspicious line item on the transcript. The damage done by the fraudulent claim will be significantly less detrimental if the refund money has not yet been paid out.

 

If your client is the victim of a fraud, they must fill out Form 14039, an Identity Theft Affidavit. The phone number for the IRS Identity Protection Specialized Unit is (800) 908-4490.

 

Tips on how to read a transcript

Transaction codes: Transaction codes are added to a taxpayer’s transcripts to indicate changes made to the taxpayer’s IRS account. They provide a literal description of any action made. That’s why post-filing compliance activity can generate confusing transcripts. Document 6209 is a guide to understanding these transaction codes. But even if you have extensive experience with transcripts, Document 6209 can be confusing and requires more context to be well understood. Many tax professionals still misinterpret codes and draw the wrong conclusions.

 

You can find a list of transaction codes in the IRS Transaction Codes Pocket Guide.

 

Automated reports: There are software solutions available that make analyzing transcripts effortless. By generating a report each time you a transcript is pulled, these solutions can make sense of confusing transaction codes.

 

 

 

Election 2020: Tax policy in a ‘blue wave’ versus a ‘red tide’

By Roger Russell

 

With the polls tightening in a number of key states, it’s still anybody’s guess as to which candidate will prevail on Nov. 3, 2020. Whoever wins, there are sure to be changes ahead in tax rates and tax policy.

 

In a Sept. 14 Deloitte poll on the tax implications of the 2020 presidential election, 57.6 percent of respondents said that a "blue wave" — a Democrat sweep of the White House and both houses of Congress — would result in a higher corporate tax rate. More than half (57.6 percent) said they think it would result in a corporate tax rate over 28 percent by calendar year 2023, followed by just over 28 percent who think the rate would likely be somewhere between 21 percent and 27 percent.

 

COVID-19-generated legislation added to an already-soaring debt, according to Victoria Glover, a partner at the Washington National Tax Office of Deloitte Tax, LLP.

 

“I think future Congresses and administrations will have to figure out ways to handle deficits,” she said. “When debt and deficits become near or close to unsustainable, congressional lawmakers will need to consider whether additional tax increases, further spending cuts, or a combination of both will need to be enacted in order to properly address rising debt and deficits.”

Whatever the outcome of the elections, taxpayers and their advisors should prepare for the policy changes that result, according to Ani Hovanessian, chair of the New York Tax and Wealth Planning Group of law firm Venable.

 

“The [Tax Cuts and Jobs Act] decreased the highest tax rate on income from 39.6 percent to 37 percent,” she said. “[Democrat presidential contender Joe] Biden has said he would like to increase it back up to 39.6 percent. In a similar vein, corporate taxes went from 35 percent down to 21 percent. President Trump would like to decrease that rate by an additional percentage point, while Biden said it should be increased to 28 percent.”

 

Likewise, the candidates take a different approach to capital gains rates, Hovanessian noted. “Biden would increase the rate for long-term capital gains for those making more than $1 million annually to match the highest income tax bracket at 39.6 percent, almost double the current rate of 20 percent. Including the 3.8 percent [Net Investment Income] surtax, the rate would top out at 43.4 percent. Contrast this approach with Trump’s proposal to decrease the capital gains rate to 15 percent, and also to index capital gains for inflation.”

 

Tax advisors should sit down with their clients and make sure they are aware of what might happen, she suggested: “Look at the assets they hold to determine if they should change their holdings. We don’t want them to rush into tax-motivated decisions without knowing their current liquidity. Even if there is a blue wave and accompanying changes in law retroactive to January 1, it could change back in a couple of years. Determine the client’s short-term and mid-term goals. If liquidity is important in the short term, see if they can convert to a Roth IRA so they can start taking distributions in the next couple of years.”

 

Given the sharp contrast in capital gains policy, if an individual is already thinking of selling some assets next year, they should pay close attention to the election, Hovanessian urged. “They may be motivated to sell this year,” she said. “There may be a 20 percent swing in the tax rate to take advantage of by selling this year as opposed to next year.”

 

While the two candidates are diametrically opposed on income tax and corporate tax, there are significant estate tax differences as well. The current estate tax exemption — the amount that can be transferred tax-free during a lifetime — is $11.58 million, or double that amount for married couples. Amounts over the exemption amount are taxed at the estate tax rate of 40 percent.

 

“Some states have their own estate tax regime,” Hovanessian observed. “For example, New York has rates ranging from 12 to 16 percent on assets over $5.8 million. There’s a lower exemption than the federal amount.”

 

Biden advocates eliminating the step-up in basis that allows the tax-free transfer at death of capital gains, Hovanessian noted. “For example, if an individual that owns stock they bought in 1990 for $100,000 dies in 2020 when the stock is worth $1 million, Biden would say that the heirs received the stock at the original basis of $100,000. If the heirs sell the next day, they would be subject to capital gains tax on $900,000, whereas under current law they would receive a step-up in basis and owe no tax.”

 

However, the proposal to eliminate the step-up in basis has been made before under previous administrations, without success, she observed. “We can’t know for certain what would happen. Taxes are an area where there are a lot of contentious issues back and forth during a campaign — this is not the first time a candidate has come up with the idea of eliminating the step-up.”

 

 

 

Road so Far

PPP Loan Forgiveness

BY MICPA

 

The Wall Street Journal reports the U.S. Small Business Administration (SBA) will begin forgiving Paycheck Protection Program (PPP) loans sometime this week according to a statement made by the U.S. Treasury Department last Tuesday1. The declaration comes following complaints from banks and borrowers alike that the process for application has been tenuous at best since the portal launch in August which has subsequently logged some 96,000 applications. Even so, that number only represents approximately 2% of the 5.2 million loans granted under the program.  

 

For the millions of borrowers that have not applied, the complexity of the forgiveness application itself could be the ultimate hurdle. According to the CPA Practice Advisor2, during a House Small Business Subcommittee on Economic Growth, Tax and Capital Access meeting, Lynn Ozer, President of SBA Lending at the Fulton Bank in Pottstown, PA stated, “Borrowers and lenders simply have been unable to complete the application process because they do not fully understand the requirements for forgiveness, and are reluctant to submit incorrect applications that could cause them to lose the forgiveness to which they are entitled, or worse, get into trouble with the federal government.” 

 

The lack of guidance issued alongside the launch of the PPP has been a component of heavy criticism from leading financial experts and organizations since its inception. While critical to stymying the economical impact of the pandemic in its early stages, emphasis was placed on distribution with guidance and regulation featuring as something of an afterthought. In fact, the U.S. Government Accountability Office recently admonished the SBA for its streamlined distribution of program funds compared to its slow implementation of oversight which left the PPP vulnerable to fraud, as evidenced by recent reports.  

 

However, the greatest areas of uncertainty for CPAs regarding the PPP revolve around two specific facets of loan forgiveness: deductibility of expenses and blanket forgiveness, according to the Journal of Accountancy3. Since forgiven PPP loans are not considered taxable income, the concern over expenses revolves around the potential for double-dipping scenarios if the expenses paid result in forgiven PPP loans. To the second point, because most PPP loans were issued in amounts under $150,000, blanket forgiveness for those loans is currently being discussed by Congress as a way to streamline forgiveness even as a second draw for struggling businesses floats for consideration, CNBC reports4.    

 

With so many details surrounding PPP forgiveness still uncertain, how should CPAs advise their clients? “As CPAs we are best positioned to assist our clients in applying for forgiveness,” advises Jamie LoPiccolo, CPA, CGMA, MICPA Board Member and Managing Member at Capocore Professional Advisors. “Without any interaction by congress, the forgiveness process is going to add some challenges to our workload over the next few months. It is best to get ahead of this earlier than later to make sure you are doing the right thing for your clients.” 

 

The MICPA urges its members to keep detailed records regarding PPP-related transactions and conclusions, including all the guidance points utilized in between. Keep a finger on the pulse of PPP guidance, policy and procedure in the coming weeks and exercise your best judgement when applying for PPP loan forgiveness, including when and how best to do so. As we continue to follow this issue closely, subscribe to our weekly e-newsletter for updates and related content.

 

 

 

Details and Analysis of Democratic Presidential Nominee Joe Biden’s Tax Proposals

By Garrett Watson

September 2020 Update: Since we released our first analysis of Biden’s tax proposals in April 2020, the campaign has proposed several new tax policies that have impacted our revenue and distributional estimates. You can see all the updates here.

 

Key Findings

  • Democratic presidential nominee Joe Biden would enact a number of policies that would raise taxes on individuals with income above $400,000, including raising individual income, capital gains, and payroll taxes. Biden would also raise taxes on corporations by raising the corporate income tax rate and imposing a corporate minimum book tax.
  • Biden’s plan would raise tax revenue by $3.05 trillion over the next decade on a conventional basis. When accounting for macroeconomic feedback effects, the plan would collect about $2.65 trillion the next decade. This is lower than we originally estimated due to the revenue effects of the coronavirus pandemic and economic downturn and new tax credit proposals introduced by the Biden campaign.
  • According to the Tax Foundation’s General Equilibrium Model, the Biden tax plan would reduce GDP by 1.47 percent over the long term.
  • On a conventional basis, the Biden tax plan by 2030 would lead to about 6.5 percent less after-tax income for the top 1 percent of taxpayers and about a 1.7 percent decline in after-tax income for all taxpayers on average.
  •  

Plan Details

Repeal the TCJA components for high-income filers

 

Impose 12.4% Social Security payroll tax for wages above $400k

 

Increase the corporate income tax to 28%

 

Establish a corporate minimum tax on book income

 

Double the tax rate on GILTI and impose it country-by-country

 

Temporarily increase the generosity of the Child Tax Credit and Dependent Credit

 

Conventional Revenue, 2021-2030 (Billions of Dollars)

$3,052

 

Dynamic Revenue, 2021-2030 (Billions of Dollars)

$2,650

 

Gross Domestic Product (GDP)

-1.47%

 

Capital Stock

-2.54%

 

Full-time Equivalent Jobs

-517,800

 

Source: Tax Foundation General Equilibrium Model, January 2020.

 

Summary of Joe Biden’s Tax Plan Estimates

 

 

 

 

Let’s end the debate: Automation will never replace accountants

By Will Lopez

 

Automation has brought significant changes to the accounting profession over the last decade. While some tools have made accountants’ lives easier, others have chipped away at their roles as startups seek to disrupt a legacy industry. The tech companies that developed these tools have also created and perpetuated a false debate about whether automation will overtake the industry completely and make accountants irrelevant.

 

It’s time to end that debate. A valued accountant is a holistic business advisor to clients, solving human problems that technology simply cannot — and will never be able to — solve on its own.

The question should not be whether automation will take over accounting, but where its real value lies. This technology has an important role in upleveling accounting, but there are clear limitations for its use. ScaleFactor offers an example of these limitations and a cautionary tale. The startup promised to replace human accountants with software and AI, but it was mostly smoke and mirrors, with people doing much of the work behind the scenes. The irony was palpable.

 

No software stack can match the financial acumen, critical thinking and trusted counsel that a human advisor offers. That’s particularly true today, as valued accountants have become business partners, not just number crunchers. Where software is limited to evaluating concrete inputs, accountants also leverage their financial acumen, understanding of clients’ business goals and observations of communication subtleties like the inflection in a client’s voice to make decisions. This allows them to serve as advisors to their clients, whether by adjusting business models in real time, building balanced and inclusive teams, or managing employee wellbeing.

 

The COVID-19 pandemic has underscored the importance of this advisory role in the face of high-stakes decisions. As many businesses have navigated changing unemployment laws, federal aid initiatives and revenue loss over the past several months, accountants have stepped up. The accountants I’ve spoken with emphasize that their clients increasingly rely on them for much more than “numbers” problems, like payroll. They are solving the “people” problems that can make or break a business and its employees’ livelihoods, like hiring or conducting layoffs in the midst of a crisis. Accountants need technology to solve the former so they can focus on the latter.

 

Empowering and supporting employees will become an increasingly important driver of business success, as studies continue to prove. Using software to automate repetitive processes gives accountants the freedom to focus on advising their clients through tough moments by leaning into their most human skills, like problem solving and relationship building.

 

Tech-driven tools and insights can’t replicate these skills, but they can enable them. As the transformation of industries like health care and manufacturing have shown, automation is most effective when used to save time, ensure compliance and improve accuracy by handling routine, tedious, time-intensive tasks. By using software to automate payroll, tax filings and payments, accountants can focus on their clients’ higher-level business challenges and opportunities. They can also more easily identify trends based on recent and historic data, then apply these insights to make recommendations informed by data.

 

This is tech at its best. At its worst, technology makes accountants’ jobs harder and can erode their clients’ trust. Software might generate recommendations based on broad generalizations, failing to account for a business’s nuanced situation or economic context. During the pandemic and ensuing recession, we’ve seen that much of the data and algorithms feeding into advanced business tools have been built for a world that no longer exists. They fall short of helping businesses solve the complex, intersectional problems they face in 2020 and beyond.

 

Accountants can add tremendous value in this new world by leaning into their advisory role. A strong accountant is pivotal to maintaining a client’s business, which in turn supports employees’ livelihoods and helps economic recovery. It’s good for accountants’ businesses, too: it’s estimated that practices providing advisory services can generate 50 percent more in monthly client revenue. Technology has a role to play, but only as a boost to the advising, problem-solving and business strategy accountants already do on a daily basis.

 

 

 

Can new IRS regs offer respite from the coming health care cost crunch?

By Shaun Hunley

 

It’s no secret that, for years, health care costs have been on the rise, reflecting a massive burden for employers and employees alike.

 

According to the Kaiser Family Foundation, the average premium for employer-sponsored family coverage has increased approximately 54 percent since 2009. In 2019, the average annual premium for employer-sponsored health insurance was $7,188 for single coverage — a 4 percent increase over the prior year. For family coverage, the average premium rose 5 percent in 2019 to $20,576.

 

Now, in the wake of COVID-19, that cost could be exacerbated, as health plans look for ways to recoup the cost of mass testing and widespread treatment. For example, in New York, insurers originally sought a near-12 percent rate hike to health plans. The state government stepped in to quash that plan, instead opting for only a marginal hike, but that’s just for 2021. In 2022 and beyond, health care costs have the potential to soar.

 

So, if an even bigger health care premium crunch is coming, is there any way for taxpayers to find some relief? Potentially.

 

Last year, President Donald Trump issued Executive Order 13877, which directed the Internal Revenue Service on how to treat certain types of health plan arrangements. This year, the IRS responded by issuing proposed regulations. These new regulations included guidance for two alternate health care strategies — direct primary care, or DPC, arrangements and health care sharing ministries, or HCSMs. Under the proposed regulations, amounts paid for DPC arrangements and HCSMs are treated as deductible medical expenses. And that just may be the key to unlocking the respite many taxpayers desperately need.

 

What are DPC arrangements and HCSMs?

Before ditching traditional health insurance plans, taxpayers first need to understand how DPC arrangements and HCSMs work. Because these arrangements can take on a variety of forms, they will need to inquire about specific eligibility requirements and any limitations on the types of health services covered.

 

Under DPC arrangements, a patient contracts with their doctor for the provision of typical primary care services (e.g., preventative care, annual checkups, laboratory tests, etc.). Fees are usually fixed and paid on an annual or monthly basis (a typical monthly fee for a DPC arrangement is around $100), and in some cases doctors may charge an additional visit fee when services are performed. Obviously, this would be far more affordable than traditional health plans; however, many patients that pursue DPC arrangements also enroll in a high-deductible health plan to cover visits to specialists, urgent care or hospitals.

 

HCSMs are organizations whose members share medical expenses in accordance with a common set of ethical or religious beliefs, thus creating a cost-burden sharing system. According to the Alliance of Health Care Sharing Ministries, 1.5 million Americans are active members of an HCSM, and to date, the Department of Health and Human Services has certified 108 HCSMs.

 

That doesn’t mean it’s a slam dunk option for everyone, though. Proposed regulations lay out some detailed criteria that a group has to meet to gain HCSM status. For example, the organization has to have been in existence at all times since Dec. 31, 1999, and medical expenses of its members must have been shared continuously and without interruption since at least that date. It also must conduct an annual audit that’s performed by an independent CPA firm in accordance with GAAP, and have that audit made available to the public upon request. But if an organization can check all those boxes, it raises some intriguing options for some taxpayers that may be looking to save money during these uncertain times.

 

The grey area

While some of these options may seem enticing, they won’t be ideal for every taxpayer. For example, it appears that the IRS suspects its definition of a DPC arrangement may be limiting. Therefore, the agency is requesting comments on whether to expand the definition to include contracts with nurse practitioners, clinical nurse specialists or physician assistants who provide primary care services. Also, the IRS is requesting comments on whether other medical arrangements that don’t meet the definition of direct primary care (e.g., dental care or certain specialty services) should be included.

 

Meanwhile, the biggest disadvantage of HCSMs is inconsistent health coverage. HCSMs aren’t required to cover pre-existing conditions, cap out-of-pocket expenses or cover essential health benefits. They also can impose annual and lifetime benefit caps. In addition, because they’re based on common ethical or religious beliefs, HCSMs may require their members to abstain from certain activities. For some, this may seem too restrictive.

 

What’s more, if a taxpayer wants to take advantage of a health savings account, taking part in a DPC arrangement would limit, or in an HCSM’s case, outright preclude an employee from contributing to that HSA, which can offer substantial tax benefits.

 

The jury’s out

As health care costs continue to soar, some taxpayers will undoubtedly want to consider health care alternatives, but tax pros will have to weigh all the pros and cons before suggesting an alternative. Depending on the taxpayer’s circumstances, a DPC arrangement or an HCSM could either be a great fit or a square peg in a round hole. Preparers can help determine which category — if any — is right for their clients.

 

 

 

Expert’s choice: Top accounting apps

By Ranica Arrowsmith

 

Accounting Today readers love technology. They’re passionate about how apps and other tech tools make them more effective accountants, benefit the clients that they love, and make life a bit easier in general.

 

This year has been anything but easy, and the COVID-19 pandemic truly tested the ability of accountants’ tech stacks to hold up to a completely remote environment, quickly. Apps with superior functionality and easy remote access were the easily identifiable favorites this year, but apps that deal specifically in forecasting, budgeting and cash-flow management have taken on special importance as businesses experience disruption on a massive scale.

 

The apps featured here function as extensions of the central accounting software platform that accountants choose to use. A key feature of a favorite or very popular app is the strength of its integration with accounting software, but there are other apps that don’t necessarily integrate that prove their value nonetheless. Ultimately, the tools serve to add value on top of standard accounting functions.

 

The apps below were selected by a panel of passionate and tech-forward users for their functionality, but also for how well they “play” with other platforms — i.e., the quality of integration they offer. This year, we also featured some favorite apps that accountants like to take home and use in their personal lives. Now, more than ever, it’s important to keep a good work-life balance, and these apps help.

 

Karbon

Category: Workflow
 

Karbon’s tagline these days is, “Enable your firm to work remotely.” As the world has gone remote, apps like Karbon that provide a cloud-based workflow platform have become indispensable — but as an app, Karbon was already indispensable to accountants who implemented it. Karbon provides workflow automation, project management, team collaboration, client management and performance analytics. Karbon also now powers Intuit Practice Management for tax professionals, a huge stamp of approval for its functionality.

 

Gusto

Category: Payroll
 

As far as payroll goes, Gusto is a favorite app among accountants. The app offers full-service payroll, health insurance, time tracking, hiring and onboarding features, and employee finance tools.

 

TSheets

Category: Timekeeping
 

TSheets is a workforce time tracking app, but also offers team management and some reporting capabilities. The company was acquired by Intuit in 2017, and has exceptional integration capabilities with QuickBooks products, which makes it a popular option for QB users.

 

HubDoc

Category: Document management
 

The quality of integration with accounting software is sometimes the key factor that makes an app “good” or not. HubDoc is very popular among accountants for its document collection and management features, but the app grew in popularity swiftly in past years for its strong integration with Xero’s accounting software. Xero acquired HubDoc in 2018, but the app integrates with other accounting software, including QuickBooks.

 

DocuSign

Category: Document management
 

In a remote environment, e-signature capabilities are a must. DocuSign is a robust app on its own, but has strong integrations with the Microsoft and Salesforce platforms as well.

 

 

VerifyIQ

Category: Bookkeeping tools
 

VerifyIQ scans client files monthly to check for anomalies and errors, and provides a dashboard visualizing file quality. The app integrates with QuickBooks and Xero.

 

 

Jirav

Category: Forecasting, analytics and reporting
 

Forecasting and analytics have taken on an exaggerated importance in 2020, the year of pandemic and social unrest. Small businesses across the U.S. that never worked with an accountant before are looking for guidance on how to navigate intense disruption. Jirav comes out on top for readers who appreciate its attractive visuals for charts and tables, and functional dashboard.

 

 

Qvinci

Category: Forecasting, analytics and reporting
 

Qvinci provides automated reports, a secure portal for communication, error detection, and workflow management capabilities. Our readers like it as an effective reporting tool for QuickBooks Desktop clients.

 

 

CashFlowTool

Category: Forecasting, analytics and reporting
 

Focusing just on cashflow forecasting and management, CashFlowTool is a snappy app to help businesses stay on top of cashflow trends. The app integrates with QuickBooks.

 

 

Veem

Category: Payments, AP and AR
 

Veem offers global and cross-border business payments on a very large scale with no upper limit on what you can send, because it uses blockchain technology to send those payments. Accountants using the app get to see an early unfolding of what blockchain can do for the profession, and for business in general.

 

 

Routable

Category: Payments, AP and AR
 

Routable offers both invoicing and payment capabilities. The app integrates with major accounting platforms Xero and QuickBooks Online, and integration with NetSuite is in the works.

 

 

Melio

Category: Payments, AP and AR
 

Melio is a vendor/contractor invoicing and payment app. Payments can be made via card or bank transfer, and users can choose whether vendors get paid by check or bank transfer.

 

 

Tax Help Software (THS)

Category: Tax tools
 

THS makes it easy for tax professionals to download IRS account transcripts and tax return transcripts (users have downloaded over 300 million in the past decade), and to handle tax resolution monitoring.

 

 

Tax1099

Category: Tax tools
 

Tax1099 offers year-end form creation and electronic filing for 1099s, W-2s and more. The app also can help with amendments for prior years when applicable.

 

 

A2X

Category: E-commerce
 

In the age of online shopping, A2X has become an important tool for any accountant who is serving clients who do business over the internet. In 2020, many brick-and-mortar companies were forced to go online, increasing the need for e-commerce management apps like A2X, which provides accounting specifically tailored to Amazon and Shopify businesses.

 

 

Beyond accounting

One of the important functions of technology tools for accountants is that they make work easier, freeing up time to take on more clients, and then to service those clients at a higher level. But the apps that accountants use for non-business functions are just as important as accounting-related apps, because if life is easier, then they are better accountants. With that in mind, here are some popular apps that our panelists take home with them and use in their lives outside of work.

USPS Online. The U.S. Postal Service’s app allows users to create their own priority mail labels for sending documents to the IRS, clients or otherwise — again, an invaluable tool in the remote age, particularly in a time of social distancing.


Evernote. Evernote is one of the pioneering note-taking apps, but it also offers templates, organization of notes, document scanning, and the ability to scan handwritten notes, as well as some workflow capabilities driven by artificial intelligence.


Slack. For accountants that love Slack, it has more than a messaging app. It offers collaborative tools as well as audio and video calling, and it has become an effective refuge from email for accountants who choose to move all internal communications there.


Kindle. Who doesn’t love a good book? For downtime, Kindle is a favorite e-reader app forAccounting Today’s panelists. Connected to Amazon, the Kindle app has access to a wider array of books than any other e-reader app, and it also offers the attractive front-lit option on some of its e-readers to save tired eyes.


Smart Things. You’ve heard of the Internet of Things — Smart Things is an app for that. It can connect various home devices, as well as light bulbs, door locks and some appliances. The big promise of the IoT is creating ease of movement through everyday tasks and routines — and our readers like Smart Things for that.

 

Our panelists

Special thanks to our panelists: Dawn Brolin, CEO, Powerful Accounting; Jay Kimelman, founder and chief accounting officer, The Digital CPA; Kenji Kuramoto, founder and CEO, Acuity; Sherrell Martin, founder and CEO, Nitram Financial Solutions; Liz Mason, founder and CEO, High Rock Accounting; and Marcus Mire, partner, PRM CPAs and Advisors.

 

 

 

How Much More Money Could The IRS Collect If Congress Gave Them More Money?

By Janet Holtzblatt

 

Would increasing the Internal Revenue Service’s funding for audits increase tax collections by more than the cost? Yes, if the funds are spent wisely. Would it increase revenues over the next decade by over $700 billion? Very unlikely.

 

In several recent articles, University of Pennsylvania law professor Natasha Sarin and former Secretary of the Treasury Larry Summers have argued that increasing the IRS budget over the next 10 years by $100 billion would raise $1.15 trillion in revenues over that period. More than 70 percent—$715 billion—would come from additional audits.

 

Contrast that with a July report by the Congressional Budget Office. CBO estimates that increasing the IRS’s funding for audits would increase revenues by between $61 billion to $103 billion over 10 years, depending on how much the agency’s budget is increased.

 

In response, Sarin and Summers have mounted a sharp attack on CBO’s estimates.  

 

Who’s right?

 

Apples to Oranges?

One reason why the options analyzed by CBO would raise a lot less money than Sarin and Summers claim is that the CBO options envision a lot smaller increases in the IRS’s appropriations. Sarin and Summers propose to increase IRS funding by about $100 billion over the decade—enough to restore the 2011 ratio of the IRS’s budget to total tax payments.

 

CBO examines two options in their report that would ramp up the IRS’s appropriations over five years. In the first version, the agency’s budget would increase by $500 million in the first year, gradually rising so that total additional spending would total $20 billion over 10 years. The second option would boost spending by $40 billion over 10 years, beginning with an increase of $1 billion in year one and again building up gradually.

 

The pace of the CBO ramp-up is a bow to both political and administrative realities. Increasing the IRS’s annual budget of $11.5 billion—the 2020 level—by over 25 or 50 percent in one year likely would be a political non-starter. Moreover, the IRS needs time to design enforcement initiatives and hire and train staff. It can take as long as five years to train revenue officers to successfully detect the most fraudulent tax returns. And training new staff usually requires experienced IRS employees to reduce their audit activity to conduct the necessary instruction.

 

Sarin and Summers say the audit options that CBO estimated are too narrow. In addition to audits, they propose more third-party information reporting and significant technology improvements. Those are indeed critical ingredients for tax compliance, and CBO included them in an even longer list of enforcement options. But the report’s authors didn’t estimate the costs of either—expansions of information reporting require statutory amendments to the tax code (which were outside the scope of a report on the IRS appropriations), and technological improvements would involve fundamental changes to the way the IRS conducts its operations.

 

Behavior matters

Sarin and Summers also question why the CBO analysis shows diminishing returns from additional funding. 

 

There are two reasons for this projected pattern. First, CBO assumes the IRS picks the lowest-hanging fruit initially in determining where to deploy new resources. For instance, a first infusion of funding could expand the investigation of taxpayers who report less income than the information reported by third parties on W-2s and 1099s show. In tax year 2013, the IRS had sufficient resources to follow up with only 24 percent of taxpayers with such income discrepancies, and that share probably has not increased. Those types of activities generally have a substantial rate of return and do not require extensive training for new employees to become effective.

 

With more sustained funding and better enforcement approaches, the IRS could increase the number and scope of audits of the complex returns of businesses and wealthy taxpayers. Those examinations would yield more revenue per audit though they typically have a smaller return on investment than audits of simpler returns because they take longer and are conducted by more specialized, higher-paid revenue agents.  

 

The second reason: Some taxpayers—especially those who can afford skilled tax lawyers and accountants—successfully challenge auditors’ assessments. In addition, taxpayers and their advisers are able to find new ways to avoid or evade taxes, often faster than Congress can enact legislation to shut down a new avoidance strategy or the IRS can detect and curb the latest evasion technique.   

 

CBO’s estimates also reflect the fact that audits, appeals, and collections all take time. Most owed taxes are paid within a couple of years after an audit, but the rest trickles in slowly or is never collected.

 

One really large open question: Do more aggressive IRS audits deter noncompliance by taxpayers? On this topic, the jury is out, and neither CBO nor Sarin and Summers account for the effects of deterrence in their estimates.

 

Just Do It

I worry that politicians will seize upon the $1 trillion estimate provided by Sarin and Summers and rush to spend it or cut taxes by that big amount—and then be dismayed when the revenues don’t materialize (as has often happened with past IRS initiatives).

 

But policymakers shouldn’t be deterred because CBO’s estimates are lower than the overly optimistic calculations of Sarin and Summers. The additional revenue generated by CBO’s options would still, on net, provide more funding for government services, lower taxes, or deficit reduction.

 

Steep cuts to the IRS budget in the last decade have led to even steeper reductions in audit rates, especially for large businesses and wealthy taxpayers, even as the annual tax gap hovered around $400 billion. Ensuring that those taxpayers pay what they truly owe would help restore confidence in the fairness of the US tax system and the federal government. And raise some money. What would be wrong with that?

 

Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.

 

 

 

 

Despite Tax Receipts, Court Orders Destruction Of ‘Historic’ Moonshine

Kelly Phillips Erb

 

 “I drunk his liquor,” said one potential juror.

 

“And honestly, I really like moonshine,” said another.

The jury selection in a 2018 trial in western North Carolina was proving to be complicated.

 

On paper, the matter appeared straightforward. A woman called 9-1-1 when her husband attempted to kill himself. Responders to the scene found marijuana and illegal booze. As a result, the woman, Michelle Lynn, and her husband both faced charges. Lynn was specifically charged with one felony (intent to sell or deliver marijuana) and several misdemeanors (possession of marijuana paraphernalia, possession of non-tax-paid alcohol, and maintaining a dwelling for a controlled substance).

 

It was the non-tax-paid alcohol that was problematic.

 

The alcohol allegedly belonged to Popcorn Sutton, a legend in the area. Sutton was born in 1946 in Maggie Valley, North Carolina. He was a modern-day bootlegger, not only producing but selling and promoting moonshine. For those of you who didn’t grow up in the South (or watching the Dukes of Hazzard), moonshine typically refers to alcohol made in secret - by the shine of the moon.

 

Sutton became something of a moonshine hero, writing an autobiography and being featured in documentaries and a self-produced video. He once remarked, “I’ve made all kinds of liquor in my time. I’ve made the fightin’ kind, the lovin’ kind, the cryin’ kind. I even made some one time and sold it to this couple – they was happily married. The next damn week, they was divorced.”

 

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His rebel persona was bolstered when he was convicted - for the second time - of owning untaxed liquor in 2007. The following year, his property was raided again after he told an undercover federal officer that he had nearly 1,000 gallons of moonshine for sale: he was subsequently charged with producing moonshine and owning a firearm after being convicted of a felony. A guilty plea in 2009 resulted in two 18-month sentences to be served concurrently. The 62-year-old man committed suicide rather than serve time.

 

Not surprisingly, his legend lived on. There was even a song written about him:

 

Unlike Sutton, Lynn eschewed a plea and took her chances at trial. She disputed the charges against her, claiming, among other things, that the liquor found on her property was part of an inheritance. She told the court that, “Popcorn said the taxes on the liquor had been paid.”

 

While the jury was deliberating the charges, the bailiff relayed several questions to the judge, including one involving paying taxes on moonshine that is gifted to someone. Lynn was eventually found guilty of maintaining a dwelling for a controlled substance, but not guilty of possession with intent to sell or deliver marijuana.

 

The jury deadlocked on the moonshine charge. That piece was slated to go back to trial, but it never happened. The detective handling the matter left the sheriff’s office, and the case was dismissed.

 

A week later, Lynn filed a motion to get her moonshine back. The state’s response? It has to be destroyed.

 

Authorities had initially argued that the taxes had not been paid when the moonshine was seized in 2016. While Lynn disputed that fact in her first trial, she provided the court a receipt and stamps indicating that she paid the tax ($230.40) on June 21, 2019 - about two weeks before she filed for its return. But Agent Steve Myers, (now retired, SBI, Alcohol Law Enforcement division) had originally testified during Lynn’s trial that “illegal liquor can’t transmogrify into lawfully possessed liquor simply by paying taxes to the N.C. Department of Revenue.”

 

The judge eventually ruled that “only a local ABC Board or a properly licensed distillery can pay excise tax on liquor” and gave deputies 30 days to destroy the liquor. Lynn - now Michelle Sutton - appealed the matter, but it was ultimately dismissed.

 

She’s still holding out hope after filing a stay of destruction, telling local media, “He’s history, a historic figure in Haywood County.”

 

“People used to come from all around to see him and get his liquor. Anywhere I go, as soon as I say I’m from Maggie Valley, people ask about Popcorn Sutton. Now I’m fighting for the last bit of his liquor there is on this earth.”


(Author’s Note: In 2010, Hank Williams, Jr. announced a partnership with J&M Concepts LLC and Popcorn’s widow, Pam Sutton, to distill and distribute whiskey named after Sutton. In 2016, Sazerac bought the distillery, but not the brands.)

 

 

 

Kansas to seek sales tax revenue from unregistered remote sellers

By Gail Cole

 

Out-of-state retailers that aren’t registered to collect and remit Kansas sales tax could soon be hearing from the Kansas Department of Revenue.

 

This enforcement effort shouldn’t come as a surprise. In August 2019, the Kansas Department of Revenue published a notice announcing sales tax requirements for retailers doing business in Kansas. It explained how the United States Supreme Court’s decision on South Dakota v. Wayfair, Inc. (June 21, 2018) had overturned “prior rulings that a remote seller must have a physical presence in a state before that state can require the remote seller to collect that state’s sales or use tax.”

 

Because of the decision, the notice said, “Kansas can, and does, require on-line and other remote sellers with no physical presence in Kansas to collect and remit the applicable sales or use tax on sales delivered into Kansas.”

 

Kansas isn’t alone in taxing remote sales, but it is unique. Following the Wayfair decision, legislatures in most states adopted economic nexus laws requiring certain out-of-state businesses to register then collect and remit sales tax. The Kansas Legislature hasn’t enacted an economic nexus law (more on this below). Even so, the Department of Revenue believes the Wayfair decision gives it the authority to tax remote sales.

 

What the Wayfair ruling doesn’t do, according to the department, is give it the authority to establish a small seller exception.

 

Every state except Kansas provides safe harbor for small sellers, those whose sales or transaction volume is under a certain economic nexus threshold. For example, California’s economic nexus threshold is $500,000; South Dakota’s is $100,000 in sales or 200 transactions; and so on. Economic nexus thresholds vary from state to state, as seen in this state-by-state guide to economic nexus laws.

 

Since Kansas has no safe harbor for small sellers, it has no economic nexus threshold. Thus, even very small out-of-state sellers are required to register to do business and collect sales tax in the Sunflower State. In fact, the state has reportedly collected approximately $5 million in sales and use taxes from remote sellers with less than $100,000 in annual sales in the state since the Kansas Department of Revenue began enforcing its remote sales tax requirement on October 1, 2019.

 

Out-of-state businesses that aren’t currently collecting tax on their Kansas sales should expect to hear from the department in the coming months. At a tax conference earlier this week, Revenue Secretary Mark Burghart said the department intends to contact large sellers first, before moving on to small sellers. 

 

Will Kansas adopt an economic nexus or marketplace facilitator law?

Though Kansas doesn’t have an economic nexus law on the books, it’s not for lack of trying. In March 2019, the legislature passed a bill that included an economic nexus provision. It also would have required marketplace facilitators to collect and remit sales tax on behalf of third-party sellers. Governor Laura Kelly vetoed it.

 

However, Gov. Kelly supports taxing remote sales. She believes the Department of Revenue’s policy “reaffirms” tax fairness. Should another economic nexus and marketplace bill land on her desk, she’ll likely sign it. Burghart expects the legislature to enact a small seller threshold in the upcoming session, scheduled to start January 2021.

 

Like most states, Kansas could use the additional revenue. Total tax collections in September 2020 were ahead of projections, but they were still $15.2 million lower than September 2019 collections. This was largely due to a decline in retail sales tax, which came in $2.4 million (1.2%) less than anticipated.

 

On the other hand, consumer use tax collections were higher than expected. Consumer use tax (aka compensating use tax) is due when Kansas residents buy goods from non-collecting vendors in other states — either in person, online, or through another channel — without paying any sales tax or paying less than the rate in effect at their home address. The fact that consumer use tax revenue has increased and sales tax revenue has decreased indicates Kansans are still consuming — they’re just buying less from retailers that collect sales tax.

 

If the department’s forthcoming notices have their intended effect, more out-of-state retailers will register to collect Kansas sales tax in the coming months.

 

Will other states increase enforcement of economic nexus?

According to Scott Peterson, vice president of government relations at Avalara, “The effort Kansas just announced is just the beginning of state remote seller enforcement actions. Most state budgets are in trouble because of the recession and two years have gone by since the Wayfair decision was issued.”

 

Mark Friedlich, senior principal at Wolters Kluwer Tax & Accounting, made a similar prediction in July, calling economic nexus compliance “fertile territory for tax auditors.” And Jamie Yesnowitz of Grant Thornton LLP expects states to undertake “more aggressive auditing” once the pandemic passes.

 

Avalara helps businesses of all sizes register to collect sales tax. If you’re not sure where you need to register, our free sales tax risk assessment can help you figure out your state tax obligations.

 

 

 

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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